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Dollar in Disarray, China Buys Away

  • July 27, 2009

This article is from portfolio manager Romeo Dator, who covers China for the U.S. Global Investors investment team.

Dollar Cartoon 072709

Since peaking on March 5, the dollar has fallen nearly 12 percent against the trade-weighted U.S. Dollar Index (DXY).

This weakness has coincided with price gains for gold, oil and copper, but several other commodities are starting to break out as well. Cocoa, sugar, cotton and orange juice prices have all jumped recently.

Dollar weakness has been especially bullish for emerging markets.

BRICs vs Dollar chart 072709

This chart above shows year-to-date performance of the dollar versus the currencies of the BRIC (Brazil, Russia, India and China) countries. The dollar’s demise has led to large percentage increases for each of the country’s respective markets.

The relationship works like this: Let’s say one dollar equals 10 Brazilian reales and an American investor purchases a share of stock in Brazil for 10 reales, or one dollar. If the dollar depreciates to eight reales per dollar, the investor could sell the share and convert the proceeds back to $1.25. That’s a 25 percent gain based on currency movement only.

A similar performance pattern this year isn’t the only thing China and Brazil have in common. The two countries have formed a strategic relationship over the past couple of years.

As the export market to the U.S. weakened due to the recession, Brazil and China turned to each other to offset the weakness. The reason is simple—China needs commodities and Brazil needs export markets.

 Chinese-Brazil Imports 072709

In June alone, China’s imports from Brazil reached nearly $3 billion, a 278 percent increase from the low in early January. That’s a dramatic increase but still below the level prior to the global credit crisis. As the global economy continues to improve, we should see this figure rise even further.

Business Week 072709China is out making deals across the world. Last week’s BusinessWeek cover story details China’s recent shopping spree which includes a car business, appliances and department stores.

China is flush with cash and 2008’s meltdown has allowed it to purchase assets at bargain-basement prices. As a result, China’s overseas investments grew to $52 billion in 2008, more than double the $26.5 billion the country sent overseas in 2007.

The second reason is China’s looking to diversify away from its massive U.S. Treasury holdings. By purchasing these companies, China is acquiring the expertise needed to move the country up the manufacturing food chain.

If growth in China continues at the level we saw in the second quarter, it’s likely China’s shopping spree is just getting started.

The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The Bovespa Index (IBOV) is a total return index weighted by traded volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Hang Seng China Enterprises Index is a capitalization-weighted index comprised of state-owned Chinese companies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Mainland Composite Index). The Mumbai Stock Exchange Sensitive Index (Sensex) is a cap-weighted index. The selection of the index members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation. The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. 09-506


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