Confidence is what gives currencies their credibility. The U.S. dollar went off the gold standard with the Bretton Woods's agreement during the Nixon administration. This occurred because more dollars were being printed than there was gold to back them (55% to 22%). Taking the U.S. off the gold standard the BWE made the dollar the world's reserve currency. This meant many commodities were priced in dollars. Some currencies were permitted to float freely while others maintained a "currency peg" to the dollar. As of late 2012 according to the IMF, the U.S. Dollar is still nearly 70% of foreign reserve holdings.
With expansionary dollar monetary policies post the 2001 and then 2008 bear markets investors became more wary of dollar holdings given supply. And, this sentiment was transferred later to other fiat (paper money) currencies in general as euro zone debt issues surfaced. For U.S. citizens' purchasing power is being lost when the dollar weakens. Investors look to the forex (foreign exchange) to hedge their dollar exposure or speculate in markets. ETPs (ETF/ETN) have emerged as an easier, less complicated and less leveraged manner to participate in these markets. These factors taken together drove investors to gold until recently.
So-called "currency wars" where for exporting countries have been deliberately, or as a result of internal fiscal policies, weakening their currency to make their exported products more competitive. But if one country should start to deliberately depreciate their currency, this isn't lost on competitors who then must do likewise. Japan's new stimulus package launched in early 2013 included a willingness to let the yen depreciate by increasing inflation in the country from 1% to 2%. Policy makers believe this will stimulate weak economic growth. But this has roiled Japanese individual investors who had invested heavily in higher yielding currencies like Australia and New Zealand only to be undone when those countries cheapened their currencies.
Prior to current currency wars, established currencies often trended best within the alt sector (commodities and currencies). This has changed given these inter-country battles. Current views are more volatile and politically driven based on policy decisions. Therefore, it pays to be active and utilize a combination of weekly and daily technical charts to manage risk.
Therefore, we feature a technical view of conditions from weekly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 22 period simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short.
This approach may be undone abruptly by government intervention then forcing investors to manage positions from a daily basis utilizing stops.
For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from ProShares and Direxion and where available these are noted.
PowerShares DB USD Index Bullish & Bearish ETFs (UUP/UDN) follow the same Deutsche Bank Dollar Index with one ETF allowing investors to invest in a long position (UUP) while the other (UDN) allows investors to invest in a short position on the same index. The Dollar Index is comprised of the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The funds were launched in February 2007. The expense ratio is 0.50%. AUM (Assets under Management) equal $639 million and average daily trading volume is 957K shares. UDN AUM equal $73 million and average trading volume is 66K shares. As of mid-May 2013 the YTD return was -4.26% and one year return -3.55%.
Guggenheim CurrencyShares Euro Trust ETF (FXE) follows the euro which is the currency of 17 European Union countries. The Euro system consists of the European Central Bank (ECB) and the national central banks of the 17 countries belonging to the euro area is in charge and implementing monetary policy for the euro zone. Politically ECB members now wish the euro would trade between €130-140 in their belief to defend the euro at "all costs" to quote Mario Draghi. The euro accounts for approximately 57% of the Dollar Index making it a major world currency. The fund was launched in December 2005. The expense ratio is 0.40%. AUM equal $253 million and average daily trading volume is 795K shares. As of mid-May 2013 the YTD return was -1.75%. The one year return was -0.09%. %. FXE trades commission free at Charles Schwab.
Guggenheim CurrencyShares Japanese Yen ETF (FXY) follows the continuation contract of Japanese Yen futures contracts. Interest can also be earned on T-Bills deposited as collateral to hold these futures contracts. The yen represents the second highest percentage of the Dollar Index at 13.7%. The fund was launched in December 2007. The expense ratio is 0.40%. AUM equal $108 million and average daily trading is 606K shares. As of mid-May 2013 the YTD return was -14.70%. The one year return was -21.59%. FXY trades commission free at Charles Schwab.
Guggenheim CurrencyShares British Pound Sterling ETF (FXB) follows the continuation contract of the British Pound which accounts for nearly 13% of global foreign exchange transactions. When favorable the fund can also earn interest on T-Bills used as collateral for futures contracts. The fund was launched in June 2006. The expense ratio is 0.40%. AUM equal $91 million and average daily trading volume is 43K shares. As of mid-May 2013 the YTD return was -5.60%. The one year return was -5.22%. FXB trades commission free at Charles Schwab.
Guggenheim CurrencyShares Swiss Franc ETF (FXF) follows the continuation contracts of the Swiss Franc as traded on various futures exchanges. The fund was launched in June 2006. The expense ratio is 0.40%. AUM equal $287 million and average daily trading volume is less than 37K shares. As of mid-May 2013 the YTD return was -4.55%. The one year return was -3.46%.
Abruptly in the late fall of 2011 the Swiss decided to peg their currency to the euro for intra-Europe commerce reasons. This was done to arrest the rapid rise in the franc and to assist borrowers in Eastern Europe to paying back franc denominated loans. This decision has rendered the franc useless as a trading vehicle since you would do just as well to follow the euro. Lastly, this decision diminished the franc's former reputation as a so-called "hard currency". FXF trades commission free at Charles Schwab.
Guggenheim CurrencyShares Swedish Krona ETF (FXS) follows futures continuation contracts and interbank market strategies to meet the trends of the Swedish Krona which represents roughly 4% of the Dollar Index. The fund was launched in June 2006. The expense ratio is 0.40%. AUM equal $68 million and average daily trading volume is less than 5K shares which renders trading liquidity poor. As of mid May 2013 the YTD return is -1.83%. The one year return is 5.38%. FXS trades commission free at Charles Schwab.
Guggenheim CurrencyShares Canada ETF (FXC) follows the interbank and futures continuation contracts of the Canadian Dollar which constitutes roughly 9% of the Dollar Index. The fund was launched in June 2006. The expense ratio is 0.40%. AUM equal $451 million and average daily trading volume is 78K shares. As of mid-May 2013 the YTD return was -1.80%. The one year return was -0.86%. FXC trades commission free at Charles Schwab.
Guggenheim CurrencyShares Australia ETF (FXA) follows the continuation futures contract of the Australian Dollar with an occasional use of interbank market positions. The fund was launched in June 2006. The expense ratio is 0.40%. AUM equal $545 million and the average daily trading volume is 176K shares. As of mid-May 2013 the YTD return was -3.88%. The one year return was 0.55%. FXA trades commission free at Charles Schwab.
WisdomTree Chinese Yuan ETF (CYB). The fund was launched in May 2008. The expense ratio is 0.45%. AUM equal $214 million and average daily trading volume is 34K shares. As of mid-May 2013 the YTD return was 1.84%. The one year return was 3.39%. CYB trades commission free at E*Trade.
Wisdom Tree Dreyfus Emerging Currency Fund (CEW) The Fund seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. Since the Fund's investment objective has been adopted as a non-fundamental investment policy, the Fund's investment objective may be changed without a vote of shareholders. The fund was launched in May 2009. The expense ratio is 0.55%. AUM equal $316M and average daily trading volume is 91K shares. As of mid-May 2013 the YTD return was 0.43%. The one year return was 3.12%. There's also the current imputed dividend from interest earned from higher yielding markets. CEW trades commission free at E*Trade.
Constituent currencies: Mexican Peso, Brazilian Real, Chilean Peso, Colombian Peso, South African Rand, Polish Zloty, Russian Ruble, Turkish New Lira, Chinese Yuan, South Korean Won, Indonesian Rupee, Malaysian Ringgit, Philippine Peso and Thai Baht.
Currency ETFs historically presented a noncorrelated opportunity for investors to diversify their portfolios. But now with obvious central bank interference in currency markets trading has become less reliable. Political considerations are also driving markets and these are hard for investors to manage technically or otherwise.
It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued.Disclosure:
I am long CYB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.