US equity markets are rising daily so it’s no big surprise that foreign money is flooding in, particularly into US tech stocks. What’s difficult to understand is how the US dollar is so weak, despite the intense buying in US stock markets.
The first part of the answer is that US stock markets aren’t the only ones rallying. The 12% rally in the S&P 500 this year and 15% climb in the Nasdaq trails markets in China, Germany, Italy, Canada and Japan (where the Nikkei is up 32% YTD). That’s not all though, as Deutche Bank highlights today:
there is also an important flow story: foreign investors are now removing dollar exposure at an unprecedented pace.
They looked at the money flowing into the US and note that 80% of the new buying in US equities this year is FX hedged, an unprecedented level this decade.
The FX implications are clear: foreigners may have returned to buying US assets, but they don’t want the dollar exposure that goes with it. For every hedged dollar asset that is bought, an equivalent amount of currency is sold to remove the FX risk.
With the Fed about to cut again, hedging the USD exposure will only get cheaper.
This article was written by Adam Button at investinglive.com.