Foreign Sectors Exposed to Strong USD

In an earlier article we discussed the U.S. sectors most affected by volatility in the U.S. Dollar. This analysis raised a number of questions from readers and clients:

  • For U.S. exporters hurt by strong USD: Do foreign competitors benefit, exhibiting the opposite (positive) USD exposure?
  • For U.S. retailers and distributors aided by strong USD: Do foreign suppliers benefit, exhibiting similar (positive) USD exposure?

Both intuitions are correct. Foreign transportation and technology companies turn out to be the top beneficiaries of appreciating USD.

U.S. Information Technology Sector USD FX Exposure

Recall from our earlier piece that U.S. Information Technology is one of the sectors with the highest negative correlation to USD:

Sector

USD FX
Correlation

USD FX
Correlation
p-value
USD FX
Beta

USD FX
Beta
p-value

Contract Drilling

-0.45

0.0002 -1.01

0.0006

Integrated Oil

-0.39

0.0011 -0.56

0.0011

Coal

-0.36

0.0021 -1.10

0.0004

Oilfield Services Equipment

-0.34

0.0042 -0.69

0.0059

Information Technology Services

-0.30

0.0109 -0.27

0.0373

Oil and Gas Production

-0.27

0.0174 -0.44

0.0131

Information Technology Services is an export industry that suffers when USD-denominated costs increase relative to foreign-currency-denominated revenues. USD appreciation squeezes margins and puts the sector at a disadvantage relative to foreign competitors. Consequently, we expect foreign technology companies to benefit from appreciating USD.

U.S. Retail Sector USD FX Exposure

U.S. Retail and Distribution are among the sectors with the highest positive correlation to USD:

Sector

USD FX Correlation

USD FX
Correlation
p-value
USD FX
Beta

USD FX
Beta
p-value

Real Estate Investment Trusts

0.29

0.0121 0.39

0.0101

Pulp and Paper

0.30

0.0102 0.52

0.0123

Aerospace and Defense

0.31

0.0084 0.32

0.0206

Beverages Alcoholic

0.33

0.0049 0.43

0.0025

Catalog Specialty Distribution

0.33

0.0045 0.41

0.0349

Department Stores

0.37

0.0020 0.70

0.0085

These businesses are sensitive to the price of imports and to the consumers’ purchasing power. When USD appreciates, U.S. retailers benefit from the drop in the price of imports and from the boost in U.S. consumers’ purchasing power. USD appreciation should also benefit foreign suppliers of U.S. retailers. Consequently, we expect foreign exporters and transportation companies to benefit from appreciating USD.

Foreign Sectors Most Positively Exposed to USD FX

There are two common techniques to quantify relationship between two variables: correlation and beta (leverage). Correlation between pure sector factor returns and USD returns quantifies the consistency of the relationship – how much of the sector variance is attributable to USD FX. Beta, or leverage, of pure sector factor returns relative to USD returns quantifies the magnitude of the relationship – how much sector changes given a change in USD FX.

Foreign Sectors with Highest USD Correlation

Foreign sectors most correlated to USD FX are dominated by transportation and technology companies. When USD appreciates, these businesses benefit the most from reduced competitiveness of U.S. Information Technology Industry, increased appetites of U.S. consumers, and decreased commodity prices:

Chart of international sector factors with market variance removed showing the highest correlation to USD FX

International Pure Sector Factors with Highest USD Correlation

Sector

USD FX
Correlation

USD FX Correlation
p-value
USD FX
Beta

USD FX Beta
p-value

China: Medical Distributors

0.28

0.0150 0.74

0.0223

Japan: Marine Shipping

0.31

0.0073 0.61

0.0206

Hong Kong: Wireless Telecommunications

0.31

0.0071 0.66

0.0061

Netherlands: Misc. Transportation

0.34

0.0043 0.93

0.0047

Germany: Semiconductors

0.42

0.0004 1.00

0.0033

Australia: Misc. Transportation

0.52

0.0000 1.24

0.0000

Foreign Sectors with Highest USD Beta

Likewise, foreign sectors with the highest beta (most leverage) to USD FX are dominated by transportation and technology companies. Chinese auto parts companies are another winner. Foreign Semiconductor and Auto Parts Sectors benefit from the reduced competitiveness of their U.S. competitors:

Chart of international sectors with market variance removed showing the highest beta to USD FX

International Pure Sector Factors with Highest USD Beta

Sector

USD FX
Beta

USD FX Beta
p-value

China: Wholesale Distributors

0.81

0.0082

China: Auto Parts OEM

0.83

0.0191

Netherlands: Misc. Transportation

0.93

0.0047

Germany: Semiconductors

1.00

0.0033

France: Semiconductors

1.02

0.0082

Australia: Misc. Transportation

1.24

0.0000

Conclusions

  • By stripping away the effects of broad markets, we reveal the performance of pure sector factors and their relationships with USD FX.
  • U.S. importers and retailers most consistently benefit from appreciating USD.
  • U.S. commodity producers and information technology exporters most consistently suffer from appreciating USD.
  • The top foreign beneficiaries of these trends are Transportation, Technology, and Auto Parts Sectors.
The information herein is not represented or warranted to be accurate, correct, complete or timely.
Past performance is no guarantee of future results.
Copyright © 2012-2015, 
AlphaBetaWorks, a division of Alpha Beta Analytics, LLC. All rights reserved.
Content may not be republished without express written consent.
Share the Insight... Email this to someoneShare on LinkedInShare on FacebookShare on Google+Tweet about this on TwitterShare on Tumblr

Leave a Reply

Your email address will not be published. Required fields are marked *