5 Reasons Why Stock Traders Should Pay Attention To The Currency Markets

The times they are a-changin’. Gone are the days when you could walk down to the corner and see the line outside of Starbucks (SBUX) and think to yourself (as you wait in line for your latte), “man what a business, I’m buying this stock!”

With all deference to Peter Lynch and his disciples, what you may have failed to consider is the impact that global economies and currencies have on a company like Starbucks bottom line.

Today, Starbucks is no longer a regional coffee shop, but rather a large global company. Not only do they have stores throughout the world (which means they have a lot of foreign currency from sales which needs to be converted back to US dollars) but they also purchase the commodities that they use (coffee, cocoa, sugar) from foreign countries, particularly those in Latin America.

So as you can see, a global company like Starbucks can be majorly impacted by dollar strength or weakness no matter how long it takes for you to get your frappacino! This is because:

ALL GLOBAL MARKETS ARE INTERTWINED!

While this may not be news to you (congrats you’re ready-sign up for a demo account free of charge) , let’s for the rest of us examine more closely the relationship between different currencies and how that affects different US stocks in this era of globalization.

1. Companies that produce goods domestically and export to foreign countries benefit from a weak dollar. Why? Because their products are now cheaper to foreigners who can take advantage of favorable exchange rates. Companies like Pepsi (PEP), Deere (DE), and Boeing (BA) will do well in a weak dollar environment.

2. Commodity-based companies will also do well in a weak dollar environment. This is because the US Dollar is the world’s reserve currency and almost all commodities are priced in US Dollars. So when the dollar is weak, commodity prices are expected to be higher. Companies who can benefit in this scenario are Exxon Mobil (XOM) and US Steel (X).

3. Conversely, domestic companies who are end users of commodities will benefit from a strong dollar. When the dollar is strong, commodity prices are lower which means it is cheaper for these companies to conduct their operations. The most common example of this scenario is the airlines, shipping companies, and other transportation companies that use oil to fuel their fleet. Think Southwest Airlines (LUV) and UPS (UPS).

4. Companies that import their goods from abroad and sell them here in the US will benefit from a strong US dollar. Wal-Mart (WMT) is the quintessential example of this scenario. Not only are they able to take advantage of the cheap labor abroad, they are now able to afford even more of it when the dollar is strong, and prices of the goods they purchase are now cheaper.

5. Travel and leisure companies will also benefit from the weak dollar as this means that travel is now more affordable for foreigners. If you live in NYC (like I do) there was a time quite recently where you could walk for blocks in midtown and not even hear English being spoken! This was a direct effect of the weak US Dollar and foreign tourists here from abroad to spend their money. Stocks like cruise lines Carnival (CCL) and Royal Caribbean (RCL) and hoteliers Marriot (MAR) and Las Vegas Sands (LVS) could stand to gain.

While these are not “hard and fast” rules, it is extremely important to understand the relationship and significance of the impact that currency exchange can have on a company’s profitability. By being aware of what is going on in the world currency markets, traders and investors can stay ahead of the game. Or you could have just waited for that line at Starbucks to shrink.

Need help understanding these relationships? On Monday, Fed chairman Ben Bernanke stressed the importance of financial education, “As the global economy continues to experience extraordinary turbulence … the need has never been greater for initiatives that help consumers learn to manage their money wisely,” Bernanke said. So now is the time to take charge of your financial future.

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