Hedging the dollar

Robert Armstrong (0:06)

Pushkin.

Katie Martin (0:09)

The US dollar is down by about 10% so far this year. That is a decent whack. And it comes despite the fact that global investors are still snapping up US assets. This is a bit of a weird pairing, to be honest. And what it is telling you is that investors, sure, they still want to buy lovely US stocks in lovely US companies, but there's a but. Investors are buying other currencies when they buy US stocks to do what boring people like us call hedging. Hedging is the new not hedging, which is nice and confusing when you host a podcast called Unhedged. So today on the show, we're asking, do we need to rename this podcast? And more seriously, why does this all matter? This is, for now, Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist down in the basement of FTHQ in London. And I'm joined by the very reverend Robert Armstrong off of the Unhedged newsletter over in New York City. Listeners, you'll be pleased to hear he has just finished his breakfast. Rob, what did you have?

Robert Armstrong (1:21)

I had a cinnamon raisin bagel with cream cheese, which is a very classically New York kind of breakfast.

Katie Martin (1:28)

The breakfast of champions.

Robert Armstrong (1:29)

Purchased from a man in an aluminum cart, which is also classically New York.

Katie Martin (1:33)

I'm pleased for you. So let's just accept that the world still wants to buy America.

This is still a thing. If you want to buy growth, if you want to buy exciting companies, stocks and exciting companies, they just happen to live in the States. And so people still want to have them.

Robert Armstrong (1:47)

We have the best companies. This much we know.

Katie Martin (1:49)

Yeah, whatever, whatever. But they are hedging away the dollar risk. This has been a big topic over the course of this year, is the extent to which global investors are like, I like your stocks, I don't like your currency. Like, why is that happening, do you think?

Robert Armstrong (2:07)

Well, for a long time, the dollar was kind of one way bet. And you bought US assets, which for the last 20 years have been going up pretty steadily. And the dollar rarely, if ever hurt you. Those two facts are connected, of course. When there is a lot of capital flow into the United States to buy US assets, those assets go up. And investors have to buy the dollar in order to purchase them. So that creates support under the dollar. But starting in the very beginning of this year, the dollar has not been so good. And it was like everyone simultaneously woke up to the fact that if you live abroad and you buy American assets, you are in fact taking currency risk. It is not a neutral position currency wise. If you are sitting in America and you buy, I don't know, Thai stocks, you know perfectly well, you better think about the Thai baht. But you don't naturally think about it in this environment about the dollar until the dollar falls 10 percent, which between January and June, it did, which is a pretty big move for the dollar.

Katie Martin (3:18)

It is a pretty big move. And so there was some very nice research that everyone was talking about last week from George Saravellos over at Deutsche Bank, who we should get on this show at some point. But anyway, he was saying that about the start of this year, hedging rates in US assets, so the amount of dollar exposure that investors were hedging when they were buying US stocks at the start of this year was roughly zero. Like nobody bothered because as you were just saying, Rob, like, why would you? The stocks go up, the dollar goes up, you win twice, everybody's happy. Now, more than 80% of inflows into the US are hedged. That's massive. That's a total switcheroo, a total turning on its head of everything we know to be right and true about markets. Like there's clearly some deep unease here.

Robert Armstrong (4:09)

There's some unease. I'm going to play the role I always play on this show and try to defend poor old America from the mean attacks from the clever British lady. So, the United States is starting a cycle of interest rate cuts, or at least so the market thinks and the Fed has hinted.

Katie Martin (4:28)

Well, we had a slice off interest rates, didn't we, in the US last week?

Robert Armstrong (4:32)

So it has already started.