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Chart Advisor: Incoming Inflation


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Thursday, November 19, 2020 Headlines

1. The US Dollar is getting weaker compared to other currencies
2. Is inflation protection working?
3. Can inflation help this company’s stock?

Market Moves

The U.S. Dollar Index (DXY) closed on its monthly low again today positioning for the index to break its support in the days ahead. Unsurprisingly, the greenback has been trending lower compared to other currencies around the world. This gives confirmation to the nagging notion U.S. consumers and investors may have felt. It’s official. You are not crazy if you think everything seems to be getting marginally more expensive. It is. The chart below demonstrates the recent drift.

This chart compares graphs of five forex pairs. These are priced with the greenback as the base currency. The dollar is paired with five other currencies: Japanese Yen (green line), Canadian Dollar (purple), Eurozone Euro (gold), Australian Dollar (blue), and the Chinese Yuan (red). The black line running through these is the 20-day simple moving average of all five pairs.

What this shows is that the greenback’s trend lower is significant. It has lost 5% of its comparative value just since July. It is hard to identify inflation in any clearer terms.

Is Inflation Protection Working?

Beating the effect of inflation has been considered a primary motivation for those who save into a retirement or pension account. Investing those funds in stocks and bonds remains the number one tool investors have to beat inflation. Over the past decade the ETF industry has produced an increasing number of ways for investors to accomplish this task.

The chart below features a comparison of one of the most well-known alternatives designed specifically to protect against inflation: iShares’ TIPS Bond ETF (TIP). This ETF tracks a bond portfolio that holds onto its value as inflation shows up. The fund hasn’t performed well over the years because inflation has been so mild. However, in the recent time frame it seems to be doing its job. The comparison to iShares’ 20+ Year Treasury Bond ETF (TLT) is unmistakable. As inflation has begun to eat away at returns for TLT, TIP has held its ground.

Chart watchers will notice that TIP hasn’t appreciated strongly through recent weeks. To find something that would do that, investors must look elsewhere.

Can Inflation Help This Company’s Stock?

The recent merger between TD Ameritrade and Charles Schwab (SCHW) consolidated the two largest discount brokers in the business. It also created a security that functions as an anti-inflation powerhouse. That’s because both companies have established their business model primarily on one kind of money making above all others. Because these brokers clear all of their own trades they are the primary custodian of all funds. That means they are able to earn interest on the cash underlying all assets. This interest that comes in is significantly more than the money paid out to customers as interest on their broker accounts.

As a result, when interest rates tick higher, their business benefits in an interest-rate windfall. One of the more regular expectations in the market is that when inflation crops ups, interest rates will rise. The chart below shows that investors have likely anticipated the benefit to SCHW shares already. If inflation continues, so should the upward trend for the stock.

The Bottom Line

The Dollar Index closed at its monthly low, positioned to break through support. This dynamic is apparent in a comparison with other major currencies. Bond-based assets designed to protect against inflation seem to confirm that inflation is present. Inflation tends to bring higher interest rates. That could benefit Schwab shareholders.

Originally Published on November 19, 2020

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