Ray Hendon

Finding Your Comfort Zone with Currency Investing

Hi, Les,
I am not aware of much research on currency ETFs. They are probably too new to attract much attention from analysts. However, even if they were I would be skeptical of their opinions. I'm equally skeptical of my own. No one can do much of a reliable prediction in this type of market, in my opinion. Things can turn on a dime at the slightest quiver of a wind from any direction.

I have read a book on trading currencies, and I thought it was fairly good. Remember, all we have are opinions, and currency trading (vs. investing) is not necessairly a teachable subject. The book I read is : Getting Started in Currency Trading by Michael Duane Archer. It is probably out of print, but I found a copy at Amazon. Also, there are a couple of authors who contribute to Seeking Alpha. Chen and Lieu (if my spelling is correct) are two you might check on.

I would encourage you to approach this subject with the greatest caution, and consider, instead, currency investing--something like the carry trade. Trading is fast paced and will eat you up fast if you are not exceptionally able to cope with it. Few are!

Good luck.

Ray0

Finding Your Comfort Zone with Currency Investing

I haven't been following CNY, since I detest most ETNs, and your report reaffirms my view on this instrument. I believe CYN is one of the ETNs that doesn't pay dividends, so the interest income, if any (and the Chinese Yuan is the last place I would go to earn interest) you will see only to the extent their forward contracts include any such accumulation. Apparently they are not. The reason for this, I believe, is that China pays less than 1% on their foreign deposits, so that precludes leaving any money there. But, even worse,the yuan is mostly traded through forward contracts which the providers "hope" will include some interest earnings. But, you can't prove that by me--especially with most ETNs.

Also, even Wisdom Tree, whose yuan fund I like more than Van Eck's, only pays dividends on an annual basis--if I recall this correctly. China is not a good place to play the carry trade.

I thank you for your post. Our readers need to know how these differences will affect them and their investments.

Best wishes,

Ray

Finding Your Comfort Zone with Currency Investing

For ETFs the providers list their assets under management on a daily basis. For ETNs they list the indicative value, which is the last price per share times the number of shares outstanding.

Best wishes,

Ray

Currency Bundles Pegged to the Dollar

PS: It is, of course, possible to earn a negative roll when the interest rate where the money is borrowed is higher than that in the country in which the currency is purchased.

RH

Currency Bundles Pegged to the Dollar

Hi, Brain. Thanks for the comment.
The local currency interest rate is, as you have discovered, difficult to pin down. This is especially true when forward contracts are used as opposed to holding the currency and buying local short-term interest bearing instruments with it. I like the second approach--interest earnings are more predictible using this method.

With respect to China, as of now, the yuan cannot be held by foreigners and deposited in China, so there is no choice but to use the forward markets in other countries. Plus, even if you could hold the yuan directly, China severely restricts where foreign monies can be deposited. For Americans, and probably every other foreigner, they are held in exceptionally low interest-bearing accounts. This is an oddity (given their high inflation rate), but China is full of these kinds of restrictions and odd-ball policies. They are new to the internation financal system, and are warry of it.

So, the Chinese authorities keep a tight reign on their financial system (separate share classes, restricted bank accounts, etc.), and it will be a long time before they join the western world and allow more or less full access to all their financial instruments.

In the meantime, I stay out of their currency ownership. I am too uncomfortable with all their restriction and their poor prospects for the carry trade. If you want to take on the yuan as a value play, you could use the Singapore dollar as a proxy, but I don't know the interest rates forecast for this currency, and forecasting what Singapore will do in the future is beyond my abilities.

Best wishes,

Ray

Currency Bundles Pegged to the Dollar

deuxsous, Thanks for your 2 cents (:>). I agree that the three south Asian currencies are more likely to creep along with their revaluation--probably following China, for the most part. And, if Saudia Arabia makes a move, it will likely be a big one. But, I'm not sure I would bet on this outcome, especially if the dollar appreciates with respect to the Euro. EAE is more difficult to predict, but I doubt they will stray very fram from the Saudi camp.

I think you are right about JEM being the riskeir of the two funds. None of the JEM members are in a driving mode when it comes to the world economy, so they all are at the end of the whip, so to speak. China is more in control of its destiny, and in complete control of its currency, and any move they make will probably bring Singapore and Hong Kong with them. They have the reserves to do about anything the would like to do for now.

I hope you are right about the monthly dividends. This would make their offering more attractive to me and more competitive with ETFs.

Ray

Currency Bundles Pegged to the Dollar

Hi, Desi:

Thank you for your kind words.

Your questions are cogent reminders that nothing is permanent in the world of currency investing, and what's hot today may be decidedly cooler tomorrow. I wish I could give you a definitive answer to your questions, but I can't. I have only weak opinions on both questions. Remember, my opinions are free, and worth every penny!

A strong dollar would be a relief to all the gulf and asian countries in PGD, since they have been forced to follow the dollar down (for the most part) for about the last eight years. Higher dollar prices with respect to the Euro, e.g., would allow the Saudis to buy more European goods. But, it would diminish the chance of a revaluation and actually increase the odds of a devaluation for the weak currencies. But, I doubt that the dollar will make a dramatic turnaround. It is more likely that it will stop falling, and, perhaps, rise at a moderate rate. But, this guess can easily be wrong. So many things of a political and economic nature can occur that would turn everything in the opposite direction.

Your second question is equally difficult to be definitive with. But, the inflation we have experienced the last few years has been caused largely by increasing demand from the emerging markets. Their increasing incomes have pushed up their demand for food and energy, and their increasing industrial productivity has pushed up demand for metals and energy. In one sense, this type of inflation is greatly benefiting those emerging markets that sell food stufs, metals and energy--Brazil, Chile, Mexico, Russia, Australia,etc. So, this would actually benefit their economies, and, by implication their currencies.

Best wishes,

Ray