U.S. Dollar Primed To Rise, Something Just 'TICed' Me Off

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Includes: BZF, DEE, DRN, DRR, FXA, IWD, IWS, REM, REZ, ROOF, SPY, UUP, XHB, YCS
by: Alan Longbon

Summary

U.S. TIC long-term purchases rose to a seasonally adjusted 72.0B, from -11.9B in the preceding month for which the figure was revised up from -12.0B.

As demand for U.S. financial instruments increase, the value of the dollar is held up.

Demand for TIC has blown the doors off analyst estimates this month and sets the dollar up for the next big leg up.

Most people would ask what is TIC? TIC is 'Treasury International Capital'.

TIC is a select group of capital monitored with regards to their international movement. Treasury International Capital is a useful economic indicator that tracks the flow of Treasury and agency securities, as well as corporate bonds and equities into and out of the United States. TIC data is important to investors, especially with the increasing amount of foreign participation in the U.S. financial markets.

So what does it mean when TIC moves up or down?

As demand for U.S. financial instruments increases, the value of the dollar is held up. Demand for U.S. dollars increases as they are needed to purchase U.S. securities. High demand also places downward pressure on interest rates.

Because this data can have a direct effect on interest rates and the value of the dollar, and because foreign ownership of U.S. debt is more prevalent than foreign ownership of U.S. equities, this data seems to have a larger effect on the bond markets than on the stock markets.

So why is this important now?

In a report, the Department of the Treasury said that U.S. TIC long-term purchases rose to a seasonally adjusted 72.0B, from -11.9B in the preceding month whose figure was revised up from -12.0B.

Analysts had expected U.S. TIC long-term purchases to rise 32.2B last month, but it more than doubled!

The increase in TIC represents strong underlying demand for the U.S. dollar going forward. It is strong not only in that it has turned positive but it has also exceeded estimates more than two-fold.

So how can this trend help me?

The obvious benefits of this trend for investors and traders are as follows:

  1. REITs will benefit from lower interest rates and an increase in the value of their prime asset being land. When interest rates go down, borrowing costs decrease and asset prices go up from the enhanced capacity to pay higher prices for them. REITs then get pushed and pulled upwards. If land and buildings increase in value, so can the amount of credit collateralized against them and thus it releases a fresh wave of credit growth into the economy. Real estate maintenance and construction is a big employer of people and user of commodities and these positive effects ripple right through Main Street. (NYSEARCA:DRN), (NYSEARCA:REZ), (NYSEARCA:REM), (NYSEARCA:ROOF), (NYSEARCA:XHB)

  2. The US dollar will benefit, so going long the dollar or simply holding your investments in dollars will give you a lift. Particularly important if you are an overseas investor and want to make sure that your total return is preserved and not just your return in your native currency. The US dollar is the world's reserve currency and when it makes a significant move in any direction, it causes ripples across the globe in all markets. (NYSEARCA:UUP), (NYSEARCA:DRR), (NYSEARCA:YCS)

  3. Commodities will decrease as most trade in US dollars. Go short commodities. (NYSEARCA:DEE)

  4. Other currencies, particularly those from commodity based countries like Russia, Australia and Brazil, will fall, so go short (NYSEARCA:FXA), (NYSEARCA:BZF).

  5. U.S. companies with substantial overseas earnings will make less in US dollar terms; this will disproportionately affect the S&P 500 as this index is overweight with mega cap export earning companies. (NYSEARCA:SPY)

  6. On the other hand mid-cap U.S. companies with domestic earnings will be largely unaffected and will benefit from a cheaper import of goods and materials. (NYSEARCA:IWD), (NYSEARCA:IWS)

Disclosure: I am/we are long DRN, HEDJ, CURE, MORL, RQI, CSQ, QLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.