Currency Trusts: Compelling Risk-Reward Investments

Some of the easiest money has been made in the Currency Shares. And why shouldn't we talk about easier profits in exchange-traded funds?

Indeed, I've talked at great length over the last 6 months about the great yields and potential for appreciation in currencies. I've been particularly fond of both the Currency Shares Australia Trust (FXA) and the Currency Shares Canada Trust (FXC).

The high-yielding currencies of Canada and Australia have climbed steadily. These ETF trusts offer attractive yields. And the capital appreciation against the US Dollar hasn't been too shabby either. Check that against the volatility of the S&P 500's SPDR (SPY).

Still, the second half of 07 may be a bit slower for these respective trusts, if only because they have come so far against the US Dollar already. Right now, both the CurrencyShares Euro Trust (FXE) and the CurrencyShares Swedish Krona Trust (FXS) offer a better risk-reward setup.

Why do I feel this way? While the US stock market has a reasonable chance to win if the U.S. Federal Reserve shifts away from its stance on higher interest rates, the US dollar stands to lose. Both the Euro and the Krona would likely gain the most, as "central banks" in Europe are still raising rates.

Note: the U.S. hasn't raised rates in a year and the lip service that Bernanke's giving to inflation-fighting is likely to wane. We now have financial credit drying up, an uptick in unemployment, a moderating economy and subdued core inflation. It follows that the Fed is likely to move to a more neutral position.

Since the US dollar would likely struggle on a perceived shift in Fed policy to neutral/rate lowering, indexes that track the US dollar would likely falter as well (e.g., PowerShares DB US Dollar Index Bullish (UUP), etc.). However, FXE and FXS should rise.

I am not suggesting a total shift away from stock assets. If the Fed plays its hand correctly, domestic and international industrials will perform handsomely. I also view large-caps as attractively priced at current levels. However, stocks will be volatile on their quest for capital appreciation.

What about other asset classes? U.S bonds will be hard-pressed to maintain momentum, except for when we see panic selling. Commodities can eat you alive if you're asleep at the "steel." In contrast, FXE and FXS offer compelling risk-reward investments.

Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[phinsuntanning]

lower US interest rates = $ 100/barrel oil = inflation+recession
higher US interest rates = cheaper oil = contraction

how US will get any oil with a japanese style devaluated currency?