With the spreading unrest in the Middle East and North Africa, we would have expected the safe currencies to spike and the others to drop. Instead most currency ETFs are up.
|Assets Class||Symbols||02/23 |
|US Dollar Bearish||UDN||3.34%||1.81%||^|
|G10 Carry Trade||DBV||1.76%||2.5%||v|
The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).
It's not clear whether the impact of the unrest has yet to filter through to currencies but we will focus on the fundamentals that are driving the top and bottom of the table.
The Swedish Krona has muscled itself to the top of the table based on the continued strength of the economy with the central bank expecting to raise interest rates again to manage credit growth and inflation. They are confident that they will continue to benefit from the strong economy and the Krona is also considered a safe currency. We expect the Krona to remain well place based on these two fundamentals for some time to come.
The Swiss Franc clearly benefited from its position as a safe haven and that is the clearest indication of world unrest. It is not clear that there is the same strength of the economy underpinning the growth. We would expect the CHF to drop as world tension eases and it may drop a couple of places.
The Aussie Dollar has dropped from being at the top but is supported by strong fundamentals. They are seeing good demand for commodities and there was good news with the private capital expenditures increase and with leading indicators rising in December. The Aussie Dollar is also something of a safe currency but there is concern that it is tied to Chinese demand and China may be impacted by the oil squeeze.
There has been significant change in the bottom half of the table but that is likely to be transitory.
The Brazilian Real continues to struggle as domestic finances remain a concern even as the Real rises against the Dollar. There are inflationary concerns which remain and the temporary additional burden on whether oil costs will slow down demand for their services. We expect the Real to rise in the longer term but stay at towards the bottom in the short to medium term.
The Yuan is largely unchanged. Like the Real, the fundamental expectations for the Yuan are good but exchange rates and concerns about the stability of the economy keep returns low. In addition, oil price spikes are a major short term issue. Again, we expect the Yuan to stay in the bottom half in the shorter term but gradually rise as with the economic power of the country grows.
We believe that the drop in the G10 Carry Trade Currencies is an artifact of the current unrest. We think that it will return to the middle of the table when tensions ease.
Currency investing is a specialized area and not for the faint of heart. We expect the top and bottom of the table to stay the same but jockeying in the middle of the table is very hard to predict.
It's also possible that all currencies will drop next week as the impact of the unrest if felt through the region.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.