New tech boom set to boost dollar

James Malcolm, strategist Deutsche Bank, says strength in the technology sector has built up in recent weeks, and seems to be on the point of generating critical momentum.

“Tech companies worldwide are reporting sales beating first-quarter estimates, order-books swelling, higher earnings guidance, and a proliferation of new M&A and large-scale foreign direct investment [FDI] projects,” he says.

The tech-heavy Nasdaq has outperformed the S&P 500 this year, while many equity analysts are bullish on the sector. So far, however, investors have been slow to catch on, with little evidence of inflows into technology stocks.

“Given the industry’s US-centric nature, one would naturally expect that country to be the biggest beneficiary of major new allocations to the tech sector,” says Malcolm.

He cites the example of the dotcom bubble in 2000. During the 10-month period of Nasdaq’s outperformance of the S&P, the dollar rose by an average of 10% against its G10 counterparts.

Of course, markets are different today, with EM in particular a different place in terms of size and stability, while balance of payments have been transformed in countries such as Australia.

Still, Malcolm maintains that the dollar remains acutely sensitive to marginal changes in the funding position of the US, and it should react positively to a booming tech sector attracting fresh investment and portfolio allocation from abroad.

Around the time of the dotcom boom, the pace of US outbound FDI and portfolio investment stagnated. Inbound FDI picked up, however, by an average of $30 billion per quarter and portfolio investment surged by $70 billion. That significantly outweighed a $50 billion deterioration in the US current account.

However, Malcolm believes a handful of Asian currencies could outperform the dollar, given the implications of a tech boom on their economies.

He says the Korean won looks attractive, given Korea has consolidated its position at or near the top of quite a few tech sub-sectors.

However, Malcolm believes the Taiwan dollar is perhaps in the “sweetest spot”.

That is because Taiwanese leading indicators are pointing to stronger growth, the central bank has turned hawkish, relations with mainland China are good and recent regulatory changes have reduced life-insurance companies’ interest in FX hedges.

“Already, the Taiwan dollar has been Asia’s best-performing currency this year in volatility-adjusted terms,” says Malcolm.

“Positioning remains negligible, it’s probably the cheapest EM currency globally – outside the Hong Kong dollar – in valuation terms and an upturn in exports is a straightforward historic precedent for further currency gains.”