Currency Bundles Pegged to the Dollar

Includes: AUNZ, JEM, PGD, SZR
by: Ray Hendon

 Good news for currency investors looking for bundles of currencies other than the Group of 10!  Last Wednesday, June 18, Barclays Bank finally brought to market two bundled ETNs that have been in the works over a year.  And, each of the currencies in both bundles are pegged, to some degree, to the dollar.

Further good news, WisdomTree began trading two new currency ETFs on June 25th: the New Zealand Dollar Fund (BNZ), and the South African Rand Fund (NYSE:SZR).  Both funds are off to a positive start, beginning their life at $25 per share.  BNZ was up $0.18 and SZR was up $0.36 after a couple of hours of trading.

The Barclays bundles are more complex.  The first is the Asian and Gulf Currency Revaluation ETN (NYSEARCA:PGD).  This ETN includes currencies of the Saudi Arabian riyal, Hong Kong dollar, United Arab Emirates dirham, Singaporean dollar and Chinese yuan.  All these currencies are welcome additions to our list of investing options.  They are all, also, pegged to the U.S. dollar, at least according to Barclays.  This is certainly true of the Saudi riyal. 

Saudi Arabia riyal/ U.S. Dollar, YTD

For YTD, note the effectiveness of the Saudi peg!  Generally currencies that are allowed to trade will show some variation around the pegged price.  So, the absolute fixity of the riyal tells me that the Saudi monetary authorities are to sole sellers of their currency.  I know of no other way to keep this kind of fixed price.

I showed the variation of the Hong Kong dollar a few days ago.  I haven’t found a source to quote the EAE dirham, but I can show Singapore’s dollar and the Chinese yuan.

Singapore dollar/U.S. Dollar, YTD

This does not look like much of a peg, to me.  SGD is up 6.5% for the year.

The yuan is a similar story:  up 5.8% ytd.

Chinese yuan/U.S. Dollar, YTD

It is not secret that the Chinese are allowing the yuan to gradually revalue.  They allow a moving band to exist around the dollar, with the band gradually drifting upwards over the year.

The rationale for this bundle is that all the currencies, pegged to the dollar as they are, are strong candidates for revaluation.  In other words, they are all value plays in the currency market.  The case Barclays makes for them being undervalued is easily seen in the graph they provide in their SEC filing below. The graph below (click to enlarge) shows the current account balance of the GDP of each nation on the vertical axis and GDP growth percentage on the horizontal axis. 

This shows the U.S. is the sole country with a currency account deficit, a strong indicator of over-valuation of the dollar.  The second axis shows GDP growth percentage of the U.S. at less than 3%, while the rest of the currencies are over 5%, another indicator of imbalance.  Although the data shown are not proof that there will be revaluations, it does make a good case that there could be one.  On the other hand, the gulf nations recently reaffirmed their desire to keep the dollar peg, but that doesn’t mean they will.

Regardless of the revaluation event, however, a buy of this bundle is a carry trade positive.  There will be interest earned on the local currency deposits.  And, in a substantial deviation from the ETN method of handling interest earnings, the interest earned on this bundle will paid out quarterly by Barclays.  This feature makes both the new bundles more attractive, since the investor will not have to pay taxes on a phantom income.

The second ETN is the Global Emerging Markets Strategy ETN (NYSEARCA:JEM).  With fifteen currencies represented in the bundle, it is certainly the more diverse of the two.  They have three sub-bundles in the ETN:

  1. Eastern Europe, Middle East and Africa is one bundle.  The specific countries in this region are: Hungry (forint), Poland (zloty), Russia (ruble), South Africa (rand), Turkey (lira). 
  2. Latin America, which includes Argentina (peso), Brazil (real), Chile (peso), Columbia (peso), and Mexico (peso).
  3. Asia, which includes India (rupee), Indonesia (rupiah), Philippine Islands (peso), South Korea (won), and Thailand (baht).

The graphic below (click to enlarge) represents what the index would have done had it existed prior to February, 2007, when it was first formulated.

JEM weights each currency equally in dollars, and will be rebalanced to this status in July of each year.

I like the diversity of this ETN, although the inclusion of Argentina in the Latin America portion of the index cause me shudders.  This country has an ugly history of mismanagement of its economy, currency and debt.  Fortunately it is only 1/15th of the total index, but it is 1/15th I would like to see gone.

Overall, I am glad to see the new offerings.  I hope there will be many other bundles of currencies offered in the future.  It give the investor a chance diversify his or her portfolio inexpensively and easily, a worthy goal for all investors who value a balanced approach to portfolio management.