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Currencies can be an important ingredient of a portfolio. Even if this is not the case, then in some circumstances they can be used as a co-relation predictive indicator for stocks and other asset type.

Currency markets trade $4 trillion (approximately) a day making it the (or "one of the") most liquid market in the world. Currency trading may be unexplored territory for retail investors and the dominant players are central banks. Despite this, the potential to earn quick money makes it a good place for speculators and billionaires.

We continue to report on currencies by using representative ETFs to uncover whether there are possible longer term investments that can be made to help provide greater diversification to a portfolio to help improve the potential for risk adjusted returns.

Assets Class

Symbols

04/13
Trend
Score

04/06
Trend
Score

Direction

Australia Dollar

FXA

7.42%

6.76%

^

Swiss Franc

FXF

7.05%

5.39%

^

Swedish Krona

FXS

6.55%

6.15%

^

Euro

FXE

4.8%

4.69%

^

G10 Carry Trade

DBV

4.13%

4.89%

V

U.S. Dollar Bearish

UDN

3.85%

3.76%

^

Brazilian Real

BZF

3.6%

1.91%

^

Mexican Peso

FXM

3.48%

3.71%

V

Canadian Dollar

FXC

2.69%

3.13%

V

British Pound

FXB

2.25%

3.41%

V

Japanese Yen

FXY

0.86%

-0.63%

^

Chinese Yuan

CYB

0.3%

0.18%

^

Overall the U.S. dollar is down across the globe which is in line with expectations due to QE-II. The trend score shows a rise in all major currencies across the globe. The momentum is still in favor of high yielders.

Please find the graph of the top currencies:

(Click to enlarge)

The Australian dollar, being the commodity based proxy currency, is creeping up due to the 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. In addition the restrictive U.S. FX legislation (i.e. no hedging is allowed in the FX market and trades must be settled on a FIFO basis) makes Australia an ideal spot for currency trading as Australia allows hedging and normal trading.

Australian dollar four week returns show a rise indicating that the gains are still positive despite a one week dip. The FXA has risen 36.81% from 31-12-2008 which are also in line with the commodity advancement.

The Swiss franc has made spectacular returns being the safe harbour currency but gains of 21.41 % from 31-12-2008 may be based more on safety aspects rather than underlying fundamentals. Some drop can be anticipated in coming months.

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.

Please find below the graph of bottom funds.
(Click to enlarge)

The Japanese yen has rallied over the last two years. However the recent disaster they suffered has put their currency under pressure as they must find ways to pay for rebuilding the areas hit by the Tsunami and Nuclear leaks.

China continues to grow as a leading provider and its economy continues to grow, until there is resolution on how the currency appreciates, there will be pressures on the returns from investing.

The U.K. pound is tending to be range bound in the region of 1.7 to 1.55. The real rally is not expected in the FXB till the time the interest rate starts to increase in the U.K. Although the inflation figures are on the rise but it is mainly due to the increase in oil and commodity prices as these factors are not controlled by the U.K. government so we are not expecting that government will take a measure in the near terms for the interest hikes.

It is worth noting:

  • The recent rise in the Canadian dollar that brings the Canadian dollar above U.S. Dollar parity. This rise is due to the recent rally in oils which is not causing the inflation worldwide but also appreciating the Canadian currency.
  • G10 carry trade is shorting yen and buying the high yielders in anticipation that in future the interest rates of the high yielder will rise drive gains. 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 trades cause concern because as long as the interest of the G10 are low the carry trade is rarely attractive.

Overall, the FED systematic devaluation of dollar by making the interest rate low near to zero to spur the growth in the economy of the USA has devalued the dollar and spurred the rally in major currencies especially the YEN which enjoyed a substantial gains before the catastrophic tsunami. In the upcoming period we presume the rally will continue in all the high yielders against the greenback till the recovery picks up major momentum in the USA.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Australian Dollar on Top Thanks to China