Currencies can be a major element of any portfolios. Currencies can be used as a predictive indicator for stocks and other assets. The dollar – the single major currency holds almost 60% of the world reserves. The currency market is 4 trillion dollar daily which is huge and was previously dominated by central banks but today retail investors can, and do, participate The leverage and potential to earn quick money makes it a place for speculators and billionaires.
We analyze the currency by using ETFs to see whether there are possible longer term investments that can be made to help provide a variant to a portfolio and also helps to improve the potential for risk adjusted returns.
|US Dollar Bearish||(UDN)||5.86%||4.22%||^|
|G10 Carry Trade||(DBV)||4.58%||4.55%||^|
Overall the US dollar gets hammered around the globe which is in line with expectations with QE-II and the Fed’s recent comments that the central bank will still keep purchasing bonds after QE – II expires. The trend score shows a rise in all major currencies across the globe. The momentum is still in favors of high yielders. Check this graph of the top currencies.
The Australian dollar is the commodity based currency; show the high trend due to surge in commodities across the board. The economy remains strong and has good balance of trade figures as China and other major trading partners drive demand for mineral resources. The change US FX legislation (i.e. no hedging is allowed in the FX market and trades must be settled on a FIFO basis) makes the Australian currency ideal for trading as Australia allows hedging and normal trading. The Australian dollar 4 week returns show a rise indicating that the gains are still positive despite a one week dip. The FXA has risen 39.89% from 31-12-2008 which is also in line with the commodity advancement. The caution is to be taking in the FXA as the gains are heavy now and the profit taking can be seen by the investors.
The Swiss Franc has made remarkable return being a safe currency. The currency has risen by 23.63% from its 31-12-2008 level making it vulnerable for profit taking by investors and speculators.
The Swedish Krona is backed by the strong fundamental. The Swedish government is estimating that Sweden’s economy will expand 3.8 percent in 2012 and 3.6 percent in 2013. The growth forecast for this year was revised to 4.6 percent from the last month’s estimates of 3.7 percent growth. Steady rise is expected in the upcoming weeks in Swedish Krona.
The chart shows the graph of bottom funds.
The Japanese yen shows remarkable returns over the last two year due to the recent disaster their currency suffered the major blow which has put their currency under pressure.
China continues to its march as a leading provider and its economy continue to grow. Until there is resolution on how the currency appreciates, there will be pressures on the returns.
The UK Pound is tending to be bound between $1.7 and $1.55. A real rally is not expected in the FXB until interest rates start to increase in the UK. Although inflation is on the rise it is mainly due to the increase in oil and commodity prices which cannot be controlled by the UK government so we are not expecting a rise in the interest rates till real inflation hits.
It is worth noting:
- The recent rise in the Canadian dollar brought the Canadian dollar above US Dollar parity. This rise is due to the recent rally in oil which is causing inflation worldwide but also appreciating the Canadian currency.
- G10 carry trade is shorting yen and buying the high yielders in anticipation of future interest rate hikes. Overall the gains are steady except in current period where after the deadly tsunami in Japan which caused whiplash in the 4 & 1 week returns. The carry trade is not back yet but the recent weakness in the yen causes concern because as long as the interests of the G10 are low the carry trade is rarely attractive.
The dollar was weakened by the FED’s systematic devaluation making interest rates near to zero to improve the domestic economic growth. The devaluation in the dollar creates the rally in all major currencies especially the yen which enjoyed a substantial gain from 2008 to 2011 before the recent catastrophe. The Australian dollar and Swiss Franc delivered the best returns year to date. Currently the high yielders are stealing the show against the dollar.