China Expects Bernanke to Weaken Dollar, so Buy Oil Stocks
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China has recently taken action to lower the value of its currency, the yuan, in preparation for a weaker United States Dollar that will result from any economic stimulus measures initiated by Federal Reserve Chairman Ben Bernake. As economic growth in the United States is declining, the markets are expecting Ben Bernanke to introduce measures like Quantitative Easing 2, which resulted in the United States Dollar falling in value with the cost of oil skyrocketing.
The cheaper the Dollar, the more expensive it is for China to export goods to America, the biggest customer for the factories of the People's Republic. By lowering the value of the yuan, China makes its products a better buy when exported to foreign countries. During the period of Quantitative Easing 2, from November 2010 through June 11, the price of the United States Dollar fell about 20 percent.
This transpired as QE 2, announced by Ben Bernanke at the Jackson Hole economic policy summit in August 2010, consisted of the Federal Reserve inflating its balance sheet to purchase $700 billion in US Treasury bonds to finance the budget deficit of the United States. No other investors would purchase US Treasury bonds, either foreign or domestic, at such low interest rates, so the Federal Reserve stepped in as "the buyer of last resort."
As $700 billion in US Treasury assets were created without the corresponding economic growth, the US Dollar fell from basic supply and demand: There were more Greenbacks, so the value was much less. Traders dumped the Dollar and bought hard assets, particularly oil. That naturally lifted the price of oil. When that happens, the shares of publicly traded oil companies rise, too. As a result, Big Oil stocks such as Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), Occidental Petroleum (NYSE: OXY), and Royal Dutch Shell (NYSE: RDS-A) all soared during the period of QE 2.
From November 2010 through June 2011, Exxon Mobil rose from around $55 to about $90. Over that same time span, Chevron jumped from under $70 a share to over $110. Shares of Occidental Petroleum went from around $75 to about $115 each. Royal Dutch Shell increased from about $55 a share to around $80. During this time, the exchange traded fund for the US Dollar, PowerShares US Dollar (NYSEMKT: UUP), fell from around $26 to about $20.
Last year, the yuan rose about 4.7% against the Dollar. This year, it has fallen 1.1% in value due to the actions of the People's Bank of China, the central bank. About 40% of the Chinese gross domestic product is based on exporting to the United States and Europe. Economic growth, at present, for China is about one-quarter lower than the annual average for the past decade of around 10%. Manufacturing growth fell again for the month of July for the People's Republic.
As Europe is in a recession, the euro has fallen 5.6% against the yuan this year, making Chinese industrial exports that much less competitive. The European Union is China's second biggest export market after the United States, so Beijing cannot allow for reduced exports that will result in massive job losses due to adverse currency developments with both. As Premier Wen Jiaboa of China cautioned about this last week, "the task of promoting full employment will be very heavy and we must make greater efforts to achieve it."
Like China's actions with the yuan, oil stocks are moving in anticipation of QE 3 or some other economic stimulus measures from Ben Bernanke, who speaks again at Jackson Hole at the end of August. For the last week of market action, Exxon Mobil is up by 2.68%, Chevron has jumped 3.09%, Occidental Petroleum has risen by 3.98%, and Royal Dutch Shell is trading higher by more than 1%. By contrast, PowerShares US Dollar fell by 1.69% for the same period of market action.
There is a value added, too. Any economic stimulus measures initiated by Bernanke will be focused on maintaining a low interest environment, which he has pledged to do until at least 2014. As Exxon Mobil, Royal Dutch Shell, Chevron and Occidental Petroleum all have very healthy dividend yields, the value of the stocks and the total returns will be even further enhanced.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.