Currency ETFs: Stick to the Yen and the Dollar

Lipper Research recently recorded 36 of 745 ETFs with gains over a rolling 12-month period. 32 of those ETFs were short-selling vehicles.

In truth, there aren't any equity ETFs with YTD gains for 2008. You have a few short-term treasury winners. And then there are a couple of world currencies... the Japanese Yen and the U.S. dollar.

I've talked about the reasons for the success of these 2 currencies at length on my radio program, "In the Money With Gary Gordon." (Listen to the show "live" or via podcast at this link.)

There are several factors that have led to dollar strength and yen dominance. Investors around the world had been borrowing the low interest rate yen and purchasing higher yielding currencies like the Australian dollar. When investors fear risk, however, they sell the higher yielding currencies and purchase the perceived safety of the low-yielding fruit like the yen. Moreover, the 2 largest economies (U.S., Japan) are the beneficiaries of risk aversion.

But it gets worse. How many investors would have expected the currencies of Sweden, Canada and Australia to work their way into bear market numbers? The Euro, the Peso, and the British Pound... all of these currencies have fallen more than 20% from their highs.

ETF Currency Investing Through 11/15/08
				Gain/Loss %	% From High	Current Yield
CurrencyShares Japanese Yen (FXY)				14.50%	-5.70%	N/A
PowerShares Dollar Bullish (UUP)				12.85%	-1.60%	N/A
CurrencyShares Swiss Franc (FXF)				-5%	-18%	1.40%
Euro Currency Trust (FXE)				-13%	-21%	4.10%
CurrencyShares Mexican Peso (FXM)				-15%	-24%	7.20%
CurrencyShares Swedish Krona (FXS)				-18%	-26%	4.20%
CurrencyShares Canadian Dollar (FXC)				-19%	-21%	3.40%
CurrencyShares Australian Dollar (FXA)				-25.50%	-34%	8.30%
CurrencyShares British Pound (FXB)				-25.50%	-30%	5.50%

It is interesting to note that many of the YTD losses on currency investments are not that much different from the % drop from the high. This is because... until the summertime... many world currencies were still peaking. Most of the damage occurred alongside the escalation of the credit crisis and the unwinding of the so-called yen carry-trade.

Are there opportunities outside of the yen and the U.S. dollar? Not in the near-term. As long as risk aversion remains intact, few investors will venture beyond perceived safe harboring.

By the same token, when the credit crisis moves from the front of the hood to the trunk, as seen in the rear-view mirror, commodity rich countries may begin to look attractive once more. Canada (FXC) and Australia (FXA) should certainly stabilize... and gain a bit of ground on the U.S. once again.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Chris B:]

"Investors around the world had been borrowing the low interest rate yen and purchasing higher yielding currencies like the Australian dollar. When investors fear risk, however, they sell the higher yielding currencies and purchase the perceived safety of the low-yielding fruit like the yen. Moreover, the 2 largest economies (U.S., Japan) are the beneficiaries of risk aversion."

Is that supposed to be a law of economics or can you explain why that is the case? Why would a currency undergoing massive dilution/expansion, earning near 0% interest, subject to massive debts and chronic deficits, and with massive demographic-led future liabilities be safer than natural resources producers with healthier debt and trade balance ratios?

Could it be more likely that most forex investment money has returned to dollars and yen under duress to reinforce damaged balance sheets in their home countries? If that is the case, as opposed to the flight to 0% safety hypothesis, then FXA, and maybe FXC or even FXM might be compelling opportunities. Also, can anyone recommend a Chinese currency ETF?

2008 Nov 20 10:40 AM

[User 310540:]

Chris, good question,

I've been wondering the same thing - but being sadly short on financial savy, leaves my intutition suggesting the alleged "flight to safety" towards intrinsically worthless paper such as U.S. dollars, is certainly due more to habitual behavior and psychology, than laws of economics.

That said, we in the U.S. should hope others around the world buying our debt continue to ignore our host of domestic liabilities and go on believing in such fictions.

However, one other variable not often accounted for in either the psychological assessments or financial models, is the U.S. military factor, which for better or worse may be seen as potentially undermining other economies, or an umbrella for ours, even while it drains our assets away.


On Nov 20 10:40 AM Chris B wrote:

> "Investors around the world had been borrowing the low interest rate
> yen and purchasing higher yielding currencies like the Australian
> dollar. When investors fear risk, however, they sell the higher yielding
> currencies and purchase the perceived safety of the low-yielding
> fruit like the yen. Moreover, the 2 largest economies (U.S., Japan)
> are the beneficiaries of risk aversion."
>
> Is that supposed to be a law of economics or can you explain why
> that is the case? Why would a currency undergoing massive dilution/expansion,
> earning near 0% interest, subject to massive debts and chronic deficits,
> and with massive demographic-led future liabilities be safer than
> natural resources producers with healthier debt and trade balance
> ratios?
>
> Could it be more likely that most forex investment money has returned
> to dollars and yen under duress to reinforce damaged balance sheets
> in their home countries? If that is the case, as opposed to the flight
> to 0% safety hypothesis, then FXA, and maybe FXC or even FXM might
> be compelling opportunities. Also, can anyone recommend a Chinese
> currency ETF?

2008 Dec 01 08:52 PM