It’s the age-old law of supply and demand, only this time round it’s not the price of goods or services that are in demand but the money that’s used to pay for them.
The flight to the dollar has been nothing short of spectacular in the wake of the coronavirus, with wild swings on the currency markets involving unprecedented percentage moves. Normally safe-haven currencies like sterling and the Swiss Franc have been battered, as the stampede into the greenback accelerates.
The dollar is now at a multi-year high against the standard basket of currencies used in the DXJ, although it did get up to around this level just before Donald Trump assumed office.
Markets think that with global business grinding to a halt, if anyone does want to get anything done, they’d better have US dollars, even though the Fed has made it less advantageous than ever to hold the greenback.
But it’s more than just a speculative move. Credit Suisse, in analysis released earlier this week, reckoned that companies outside of the US are likely borrowing US dollars to cover payments to suppliers they might otherwise miss.
What that means is that for the time being, the global economy is being propped up by increased amounts of US-denominated debt, with the catch being that there isn’t actually enough liquidity to meet demand.
So the dollar is on the rise, and is likely to stay that way for a considerable time yet, even against all the protestations of President Trump, who has consistently campaigned for a weaker dollar.
What that means is that for those who can keep their nerve about them when everyone else is losing theirs, and who are holding dollars, are in a very advantageous position.
The next best position, from a UK perspective, is to own companies that derive their earnings principally in dollars, in particular those in the commodities markets.
It may seem counter-intuitive now to be buying either oil or mining companies when commodities prices are on the decline, and the share prices of those who produce them are dropping too.
But looking slightly further out, those in production and selling oil or gold or copper, remitting the resultant dollar earnings back into their treasuries and then onto their shareholders, will have a head start on any company that’s still booking earnings in a decimated currency.
The commodity prices themselves will move before the equities, and on that front it’s also worth thinking about how supply is likely to look for the rest of the year. With supply chains in chaos, the commodities that can be delivered could be priced significantly higher.
Because the crucial variable here is actually demand. If demand recovers relatively well as the world moves on from coronavirus and discovers that there’s neither systemic damage to the financial system nor real damage to infrastructure, the tricky part will be reconnecting all the moving parts of the mechanism.
That will take time, supply will be squeezed, and prices will rise. If those prices are already in highly-rated currency, then the benefits for investors will be exponentially greater.