Chart-Topping Currency ETFs with Technical Strength

I received an e-mail from a concerned reader. He said, "Why would anyone invest in a currency? Aren't they exceptionally volatile? Couldn't they collapse or become worthless?"

The idea that currencies are volatile comes from a number of currency crises in the past. There have been times when the Russian rubble or Thai baht or other emerging country's paper has completely collapsed. However, developed markets from Australia to New Zealand to France to Canada haven't been regarded as reckless paper printers.

(Yes, I know. We can debate the recklessness of the U.S. government's paper printing till the oceans run out of fish. However, at least for the moment, it's worth noting that alternative currencies may be used to hedge against a falling dollar.)

For example, if you're troubled by the notion that your investments are too exposed to a falling greenback, or if you are worried about the U.S. dollar's status as the world's currency reserve, the CurrencyShares Australia Dollar (FXA) may be an effective hedge. And here's why:

1. Australia's Economic Recovery. One of the last economies into the global recession one of the first out. CurrencyShares Australia Dollar (FXA) is a less risky, less volatile way to invest in the potential success of the Australian economy which is based largely on basic materials and natural resources. China's numerous deals with Australia, and the former's interest in acquiring commodities or commodity companies, is giving a legitimate boost to the country's well-being. Consequently, many view the currency as a safer haven than the U.S. dollar.

2. Currency Shares Australia Dollar (FXA) Technical Uptrend. In early March, FXA entered a short-term uptrend, at about the same time that stock markets began snapping back from miserable, multi-year lows. In late April, FXA had entered a long-term technical uptrend, as the price had moved above its 200-day moving average. By mid-May, chart-followers were further validated by the 50-day trendline crossing above the 200-day trendline.

3. Carry Trade. The return of investors borrowing from low interest rate countries like the U.S. and Japan and investing in higher yielding currencies like Australia and New Zealand also bolsters the case for appreciation in FXA; moreover, as a hedge against a falling U.S. dollar, Australia's dollar is often purchased, which is yet another reason for an expectation for appreciation.

Currencies can also be used for income as well as potential appreciation. If nothing happens for the Australian dollar versus the American dollar, you can still pick up income. CurrencyShares Australia Dollar (FXA) offers a 4.6% annualized stream.

There's another way to get carry trade results. The PowerShares DB G10 Currency Harvest Fund (DBV) tracks an index that shifts the choice of currency holdings based on the yield of the ten top world currencies — the G10.

(Read more about the PowerShares DB G10 Currency Harvest Fund (DBV) here.)

Full Disclosure: Gary Gordon, MS, CFP, is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[McCabe:]

I couldn't agree more. Finally, someone understands the fundamental use for these products. The FXA is a demand deposit account held at JP Morgan that pays a yield as dividend. The other thing that people should be looking at is covered buy-writes. You can buy 100 shares of FXA than sell 1 slightly out of the money call. This gives clean non US Dollar exposure and reduces risk, while capturing time premium on the option. Call your own experts but it seems like a good idea to me.

Jun 21 08:21 PM

[RiskReturnO...:]

DBV is finally moving ... about time, as FXA has being up, and FXY refuses to break down ... watch volume on DBV to get next confirmation of uptrend momentum. With risk trades taking a break, it's good to see some follow through on DBV. Let's see if the relative strength continues into next week ... watch Iran situation and yen safety trade for confirmation.

Jun 21 08:58 PM