Foreign Sectors Exposed To Strong U.S. Dollar by AlphaBetaWorks Insights

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 U.S. dollar.

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. U.S. dollar 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 U.S. dollar FX.

Foreign Sectors with Highest USD Correlation

Foreign sectors most correlated to USD FX are dominated by transportation and technology companies. When U.S. dollar 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:

U.S. Dollar

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 U.S. dollar 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:

U.S. Dollar

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 U.S. dollar.
  • 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.