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A weaker dollar

By Marius-Cristian Frunza
Weekly Briefs

The pandemic has changed not only the structure of the economy but also economic theories. Traditional models cannot be applied to current circumstances. High debt to GDP ratios, massive stimuli packages, quantitive easing strategies, contraction of demand levels, lower industrial outputs, …   All parameters of a stable economy seem in a deep turmoil, and yet the stock market is thriving. What can we expect in the near future? Should be all-in on tech shares? What is the best hedge?  

The money printing machine is inflating the stock market, which is driven by a few tech values. Money flows in the real economy do not lead automatically to an increase in consumer prices because the demand is lower, thereby implying a deflationary phenomenon. Developed countries can issue more debt because banks will buy governmental bonds even if these newly issued instruments pay no yield.

Everything looks fine, except for one aspect. In a globalised Forex market, investors may short those currencies, which went through a massive printing. The US dollar is already experiencing a constant depreciation compared to the Euro.  The emerging currencies may be the real winners of the current global crisis.  BRICs’ governments (Brazil, Russia, China and India) don’t have the luxury to trigger the money helicopter. Therefore, the supply for the emerging currencies is scarcer, thereby bolstering their exchange rates to the leading currencies.  

The current rally on the major stock markets should be interpreted with a grain of salt. Buy and hold strategies may bear a significant risk if the leading currencies are entering negative territory. Investing in emerging currencies could constitute an effective hedge for an equity-driven portfolio.

A U.S. dollar is an IOU from the Federal Reserve Bank. It's a promissory note that doesn't actually promise anything. It's not backed by gold or silver. P. J. O'Rourke, American political analysts and journalists.

Market overview

Oil prices made a strong comeback since early November. OPEC’s strategy backed by Russia to decrease oil production seems to give results, and the Brent regained some of the territory lost in March. If the Pfizer and Moderna vaccines prove their efficiency, the Brent has good chances to get support above 50 USD.

The volatility is still at a relatively low level, and there are no signs of a regime switch in the short term. More signals may come into the market after Biden’s official investure.

Forex:

Chinese Yuan

While the whole world is struggling to tackle the new coronavirus pandemic, for China, this episode is just water under the bridge. The Chinese economy grew by almost 5% in the third quarter, while other developed economies are dealing with extended lockdowns.

Interestingly, China’s Central Bank did not opt for a money printing strategy. Thus, the Chinese Yuan - Dollar rate exhibited a constant positive drift since the beginning of the summer. The trend is proportional to the speed of the American money printing machine.

The Chinese currency has a positive outlook for 2021. In a global context where the pandemic hinders economies, China will reinforce its leading position.

Forex:

Russian Ruble

Since the US and the UE inflicted the first set of sanctions against the Russian Federation amid the outbreak of the conflict in East Ukraine, the Ruble had a volatile evolution. The Russian Central bank made desperate efforts over the past five years to keep the Ruble stable by buying a considerable amount of gold on international markets.

When the COVID-19 outbreak hit Russia during the summer, Moscow had minimal options to implement quantitative easing. Russia’s GDP is expected to contract by 3%, a lower figure compared to the leading European economies. Thus, there are good chances to see the Ruble-Dollar rate gaining momentum over the next year. Nevertheless, if the Biden administration prepares a new set of sanctions against Russia, the Ruble will suffer.

Focus:

Loop Industries

Loop Industries seems to have passed the highest point of their Nasdaq carrier. The company that claims to disrupt plastic recycling technology went through another significant dip, amid a global rally in the stock market. Hindenburg Research, a financial forensic research firm issued this week another report concerning Loop. It underlines that the Canadian company did not show relevant evidence to support their strategy.  The outlook for Loop industries is not favourable.

Cryptocurrencies:

Ethereum

There are too many crypto-currencies, and beside Bitcoin, they are all useless. We heard this phrase repetitively since the previous bubble. While this statement might hold water, we should not forget that most blockchain innovation revolves around Ethereum. CME Group, the leading derivatives exchange for commodities, announced the launch of Ether futures in February 2021. It is a clear signal that major financial institutions are interested in developing strategic investment activities in Ether. Thus, the second cryptocurrency in terms of market capitalisation may have a promising start in the new year.  Currently, Ether is trailing in the race with Bitcoin, but when the bubble bursts, investors may reconsider their priorities.

Market outlook

Dow Jones is retaining its gains from the November rally and ends the week above 30,000 USD. The foreseeable stimulus package brought support in the market. As predicted Gold regained territory and is expected to continue its positive trend throughout the last days of the year.

Bitcoin is entering in a bubble, the price going above 23,500 USD.   Bitcoin believers and institutional investors saw the potential for Bitcoin to expand and contributed significantly to the unprecedented rally. There are also many speculators in the market so we could expect some small corrections early next week amid technical sales.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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