Over the last few months, investors have become increasingly skeptical about the long term health of the world’s two major currencies, the dollar and the euro. Debt worries are plaguing each and forcing many to reconsider the wisdom of holding onto assets denominated in these two sinking ships. As a result, many have sought refuge in alternative currencies, the most popular of which being the Swiss franc. Yet, with last week’s historic decision to peg the franc to the quickly-crashing euro, investors have been forced to head for the exits in this key currency or be sucked into the quicksand of the euro zone as well.
For investors concerned about this sudden destruction of one of the world’s last safe havens, there are a variety of currency products that could step up and become new choices for those looking to weather the storm. By our count, there are 30 currency ETPs available for purchase, giving investors a multitude of options in the space. Of these funds, over 20 are posting gains year-to-date, suggesting that there are a number of ways to obtain some level of safety - and diversification - with currency-focused funds. Below, we highlight three of our favorite choices to help investors find a new safe haven currency for their portfolios:
CurrencyShares Australian Dollar Trust (FXA)
Australia’s currency makes for a good choice for a new safe haven for several reasons. The country has a relatively low level of public debt and is currently a net exporter, putting it in a solid trade position. Furthermore, unlike Switzerland, which is surrounded by nations using a single, flailing currency, Australia has a diversified mix of export destinations ensuring that a single currency crisis won’t bring the country down. Additionally, investors should note that thanks to Australia’s vast exports of key commodities, along with the large number of Asian nations right at its doorstep, an American/European slowdown is unlikely to hurt the country as much as other developed exporters such as Norway.
The easiest way to play the Aussie dollar is with FXA. This popular currency product from Rydex, with close to $900 million in AUM, seeks to give investors exposure to movements of the Australian dollar against the U.S. dollar. The product has a beta of just 0.43, suggesting that it is relatively uncorrelated to broad markets, making it an ideal safe haven. furthermore, the fund has gained 2.7% so far in 2011 and has put up truly impressive returns over the long term, gaining 38.2% over the past three years and 66.2% over the past five.
CurrencyShares Swedish Krona Trust (FXS)
Sweden’s krona makes for an interesting choice for investors seeking a new safe haven while still staying in Europe. The country is rated "AAA" by all three of the major ratings agencies and for good reason. Sweden has a modest public debt level that is 35% of GDP while forex reserves are ample, coming in at roughly 15% of economic output. While the country does have some exposure to the European crisis, its top export destinations aren’t dominated by eurozone economies so it should be relatively unscathed if the worst happens. Furthermore, given the questions surrounding the health of many other European economies, such as the U.K., the krona is one of the few safe spots left for European-focused investors.
Another product from Rydex is the best way to play the krona, FXS, giving investors exposure to the movements of the Swedish currency against the U.S. dollar. While the beta for FXS is slightly higher than the one for FXA, it is still below 0.5, suggesting a relatively uncorrelated performance for this currency product as well. Furthermore, despite the extensive turmoil in many of its southern members, FXS has held up pretty strong, gaining 2.1% so far this year and nearly 11.1% in the past 52 weeks.
Dreyfus Chinese Yuan Fund (CYB)
Given China’s meteoric rise and seemingly unstoppable economy, the country’s currency could make for a new safe haven destination. Not only does China have more than 1,000 tons of gold, fifth among all nations, but it also has close to three trillion in forex reserves, by far the most in the world. These impressive metrics, combined with the robust and growing strength of the domestic economy, has helped to push the demand for renminbi far higher in recent years. Yet, by some estimates, the Chinese yuan is still undervalued by as much as 40%, suggesting huge gains could be had and that winds are at the yuan’s back. Furthermore, given the relatively high inflation rates in China, the government may decide that a more rapid appreciation of the yuan may be preferred, further cementing the yuan’s status as a safe haven.
To play the yuan, investors have a couple options but CYB has been the better performer so far in 2011. The fund from WisdomTree focuses on currency forwards to accomplish its objective and collateralizes the investment with short-term Treasury bills in order to help boost the yield of the product. While CYB has gained less than the other two products on this list, rising by just 1.6% year-to-date and 4.4% over the past three years, the prospect of a sharp appreciation in the Chinese yuan is always present so further gains could be had by investors looking to buy in for the long term.
Disclosure: long Chinese yuan.
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