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Even better-than-expected earnings in the United States earnings season are not enough to stop this year’s slump in software companies. And currently this sector is facing another unfavorable factor – a strong dollar.
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The cloud company Salesforce recently announced positive results for the first quarter and at the same time published a relatively optimistic forecast for the coming months. However, even these positive factors failed to “free” the company from this year’s fall of its shares by almost 30 percent. Although the company’s positive outlook triggered stock growth last week, the company has expressed significant concerns about its sales this year.
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And the problem, she said, is the strengthening dollar. The dollar index, which tracks the performance of the US dollar against a basket of six leading world currencies, has strengthened by almost 14 percent over the past year and reached its highest level since 2002. This forced many multinational companies to lower sales expectations for the rest of the year. A stronger dollar reduces the revenues of companies from abroad when converted to the dollar.
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According to Bloomberg, a total of 85 percent of software companies listed in the S&P 500 stock index performed well overall, exceeding both analysts ‘and investors’ expectations.
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Nevertheless, the sector is experiencing one of the strongest sell-offs of all sectors, mainly due to investor expectations that the US Federal Reserve (Fed) will further tighten its monetary policy. Rising interest rates are weighing on highly valued stocks and, in addition, are supporting the growth of the dollar and raising fears of a possible recession.
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Why the dollar is strong
“The currency markets expect the US Fed to raise the key interest rate by half a percentage point next week, as well as in July. This, of course, attracts very strong investors’ attention towards the dollar, “comments Ondřej Hartman from the FXstreet.cz trading portal for SZ Business.
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The dollar is gaining strength partly because investors around the world perceive the United States as a country with economic strength and stability, especially in the current environment of geopolitical tensions caused by the war in Ukraine. When foreigners invest in US stocks and bonds, they usually have to use dollars, which strengthens the exchange rate.
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“The US dollar has strengthened again on world foreign exchange markets, and this is most evident against the Swiss franc and the Japanese yen. It looks like the dollar has revived its rising trend in April, ”adds Hartman.
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Microsoft has even lowered its profit and sales forecast for the quarter due to the strong US currency. Gates, a software company that is currently losing a fifth of its value on the U.S. stock market this year, has become another of a number of U.S. companies to warn of the adverse effects of a stronger U.S. currency.
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“Software companies, including Microsoft, have significant operations outside the United States, and I think Microsoft is vigilant here to avoid market expectations and be transparent in the event of a currency impact,” Steve Koenig, CEO of SMBC Nikko Securities, told Reuters.
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At the same time, the declining technology stock market partly reflects the yield on ten-year US government bonds, which rose from 1.35 percent in December to 2.9 percent. Higher interest rates reduce the present value of expected profits, and for highly valued software companies, much of the profits are therefore in sight.
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According to KeyBanc Capital Markets, software stocks had the potential to fall by as much as 27 percent in May from pre-coronavirus pandemic averages. This calculation includes the ratio of corporate value to free cash flow.
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Influences are also perceived by other sectors
Other potential victims of the rising dollar are companies operating in large export markets. Last month, Deere & Co., a maker of agricultural and construction equipment, also warned that a strong domestic currency is likely to cut off its sales.
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Pharmaceutical companies selling drugs and medical products on international markets have also suffered losses. At the end of April, the pharmaceutical company AbbVie stated that exchange rate effects reduced sales by 1.3 percent in the first quarter of this year, which was before the dollar reached its last highs last month. For the full year, AbbVie then predicted that a rising dollar would reduce sales by 1.4 percent.
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More expensive electronics
The expensive dollar, together with high inflation, makes the import of goods more expensive for Czechs. Although most imported goods are paid in euros, we can still expect higher prices for some products, especially those outside the European Union. These are mainly mobile phones or computers and other electronics.
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Over the last year, the Czech currency has weakened against the dollar by about ten percent, which causes certain complications in the domestic market, precisely because of the aforementioned import prices. One dollar currently costs about 23 crowns, one euro then about 24.74 crowns.
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“For exporters and importers (and also for the CNB), however, the koruna market with the dollar is not as important as in the case of the euro against the koruna, and therefore we cannot expect any intervention through verbal or real intervention,” says Hartman of FXstreet.cz. The CNB does not expect an artificial strengthening of the koruna against the dollar.
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According to him, the Czech currency will thus “live its life” against the dollar, and the monetary policy of the US Federal Reserve and the exchange rate of the main currency pair EUR / USD will influence the further development of the exchange rate.
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“If USD / CZK stays above the level of 23.00 crowns per dollar, we could gradually reach levels around 23.60-23.80 per dollar. We do not expect a significant movement above 24.00 unless the geopolitical situation in the world worsens further, “Hartman estimates the further development of the koruna against the dollar.
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