BCA Research recommends selling the US dollar and buying currencies of current account surplus countries including the Korean won, citing parallels between today's macroeconomic environment and the late Bretton Woods era. The independent research firm warns that the dollar is transforming into a pro-cyclical, risk-on currency as the US runs a $1 trillion current account deficit funded entirely by foreign stock purchases. BCA Research draws comparisons to the 1960s-70s period when large US fiscal deficits from Vietnam War spending and domestic programs preceded the collapse of the gold standard and a 10.7% dollar devaluation in 1971.
BCA Research Draws Bretton Woods Era Parallels
BCA Research stated in a recent report that "today's macroeconomic environment resembles the late Bretton Woods era in terms of large US fiscal deficits and deepening dependence on foreign confidence in currency and assets." The firm noted that during the late 1960s to early 1970s, the US recorded massive fiscal deficits due to heavy spending on the Vietnam War and domestic policy programs. BCA Research observed that US inflation and long-term bond yields began a structural rise in 1965-66, with the same pattern emerging since 2021. The research firm also pointed to similarities between the "Nifty Fifty" large-cap stocks that led the US bull market in the late 1960s-early 1970s and the past four years' US stock rally.
US Current Account Deficit Relies on Foreign Stock Purchases
BCA Research highlighted that unlike the past when the US had a much healthier balance of payments, the country now depends far more heavily on foreign portfolio capital inflows. The firm stated that the US current account deficit of $1 trillion is being filled entirely by foreign purchases of US stocks. BCA Research assessed that such buying cannot continue indefinitely. The research firm evaluated that when foreign capital inflows decrease, the dollar would need to fall sharply to balance the international accounts, and US policymakers would prefer dollar devaluation over interest rate hikes. BCA Research forecasted that through this process, the dollar would become a pro-cyclical, risk-on currency that moves together with the stock market.
BCA Research Recommends Surplus-Economy Currencies
BCA Research pointed out that the dollar is overvalued based on real effective exchange rates measured by unit labor costs. The firm recommended selling (shorting) the dollar against the Korean won, Japanese yen, Taiwan dollar, Singapore dollar, and euro. These are currencies of countries running current account surpluses. BCA Research assessed that these currencies have high potential for appreciation. The firm emphasized investors should "get out of the dollar" as the probability increases that the dollar will transform into a pro-cyclical currency.
BCA Research Suggests Short-Term China Stock Strategy
In a separate report, BCA Research analyzed that the KOSPI index may face further declines, while investors could profit from a China stock market rebound in the short term. The research firm noted that in the medium to long term, the profitability of Korean semiconductor companies would be superior to Chinese tech firms, adding that this strategy is only valid for a short period within three months.
FAQ
Why does BCA Research compare the current US economy to the Bretton Woods era?
BCA Research compares today's macroeconomic environment to the late Bretton Woods period because both feature large US fiscal deficits and deepening dependence on foreign confidence in currency and assets. The firm notes that US inflation and long-term bond yields began structural rises in 1965-66 and again since 2021, with similar stock market concentration patterns.
What currencies does BCA Research recommend buying against the dollar?
BCA Research recommends buying the Korean won, Japanese yen, Taiwan dollar, Singapore dollar, and euro against the US dollar. These are currencies of countries running current account surpluses, which BCA Research assesses have high potential for appreciation as the dollar faces devaluation pressure.
