market views

Trends Come and Go. Diversification Persists.

Frank Trotter | June 1, 2016 3 MIN READ

As a banker, it's always fun to watch movies about our business, whether good, bad or even cartoonish. Some of the best ones, such as It's a Wonderful Life and Mary Poppins, are classics that also happen to center around runs on a bank. In Mary Poppins, I'm reminded of some words that resonate strongly with me today. You may recall them, too. As sung by Bert, "Winds in the east, mist coming in. Like something is brewing and bout to begin. Can't put me finger on what lies in store. But I fear what's to happen all happened before." A little later, Mr. Banks chimes in, "Never better. Money's sound. Credit rates are moving up, up, up. And the British pound is the admiration of the world." Over the last few years, however, it's been the U.S. dollar getting the attention. Is that tide starting to shift?

After 2008, the U.S. dollar wandered for a couple of years then rose strongly in the wake of European difficulties, cratering commodity prices, slower economic growth around the world, and a general flight to quality. The year 2015 was a particularly strong one for the dollar as almost every currency lost ground to the buck. In a recent writing in The Daily Pfennig®, I questioned if we were coming to the end of the U.S. dollar's strong run. Since the top of the year, many currencies have turned the corner and begun to gain on the U.S. dollar. As a result, today, I am feeling more and more strongly about the possibility of a new trend in foreign currencies: strong against the dollar. Not to be outdone, commodities, including gold for example, also appear to be trending up.

Year To Date Performance Figures — Through 05/13/16

Source: EverBank Research Team, based on analysis of Bloomberg data.

Why Might This Be Occurring?

First, the commodity prices of the past several years, which were indicative of a combination of oversupply and economic weakness, have begun to turn. It appears that while the global economy isn't at full steam, it may have shifted out of first gear for the first time in years.

Second, the U.S. economy is no longer the only one showing some signs of resilience. Even the Eurozone, long dragged down by the outlier countries, is showing positive signs of growth.

Finally, at near zero interest rates across the board there is only a nominal yield advantage to holding funds in U.S. dollars. The U.S. 10 Year Treasury Note has fallen over one-half of one-percent since the first of the year and is again creeping downward.

So What to Do?

For years we have suggested that people consider diversifying a portion of their portfolios in foreign currencies. I maintain some level of exposure all the time. We also suggest expanding that allocation if the individual believes that a weak U.S. dollar trend is taking hold.

Today, specifically, we are watching a combination of first and developing world currencies deeply involved in the production of commodities, including a long-time favorite Australia, our NAFTA partners Canada and Mexico, Chicago School favorite Chile, and, finally, South Africa. All have a few blemishes but all have great possibility.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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