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4 Currency ETFs to Hedge a Reversing Dollar

|Includes: CYB, FXA, CurrencyShares Canadian Dollar Trust ETF (FXC), JYF



The US Dollar has been on a tear lately – but let’s not lose sight of what that means.  Relative to other currencies, the Dollar has been rising.  But, then, that’s sort of like damning with faint praise.  The Brazilian Real is declining, the Chinese Yuan is barely holding its own, the Japanese Yen has slipped a bit, and the Euro is in shambles.


But if we compare the Dollar’s purchasing power in something more constant, as I did recently in an article on the median value of US homes over the last 40 years priced in gold rather than in dollars (here), a  somewhat different picture emerges.  Whether you want to compare the Dollar to gold, timber, mineral rights, unimproved land, water rights, Old Masters, rare stamps, Faberge eggs or the 52-year-old Jaguar XK150 I’ve been restoring for 25 years and now drive spring, summer and fall (with 250,000 miles on it,) some things keep up with inflation and some don’t. 


By and large, you’ll find that items like those I just mentioned can be swapped between their respective classes for something like what they would have fetched 30 years ago or 20 years ago or 10 years ago.  That is to say, my old XK-150 wouldn’t have bought one tiny jewel on a Faberge egg 30 years ago and it still won’t – but it would sell for the same “x” ounces of gold today that it sold for back then, or the same small timber farm, or the same half-interest in a particularly rare postage stamp, etc. 


If I let myself be fooled into thinking that my purchasing power has increased along with the rising value of these things in Dollars, I’d be in for a shock.  My stately and elegant roadster may now be worth $90,000 instead of $50,000 in Dollars – but it takes $90,000 USD to buy what $50,000 bought when my car was only worth $50,000!  That doesn’t make it a bad investment.  On the contrary, I haven’t lost purchasing power in the land on which my house sits (nor in the house, but that was a matter of fortuitous timing) or in my XK150 or in my gold coins.  To not lose purchasing power while my government foments insidious and hidden inflation so it can pay back bondholders in Dollars worth less every year is an accomplishment in itself.


That’s why, in those periods when I expect difficulties for the equity markets – like now – I buy either floating rate bonds and bond funds whose payable rate is reset to rise as interest rates for similar securities rise, or I buy only short-term bonds which mature in a year or two and are therefore less likely to fluctuate in value.


The other thing I will do in Times Like These is to buy currency ETFs where I see a special situation arising.  Now, I make no claim to being a ForEx trader.  As a matter of fact, it is an inside joke with my wife and I that we both qualified for every brokerage industry license there is except that I also become a Municipal Securities Principal and she a Foreign Exchange Principal.  But what I can do is identify both short-term special situations and long-term diversification situations where I believe another currency will rise versus the US Dollar.


The two short-term special situations are the Chinese Yuan and the Japanese Yen, as represented by the WisdomTree Dreyfus Chinese Yuan Fund (NYSEARCA:CYB) and the same firm’s Japanese Yen Fund (JYF.)  I invite you, as always, to conduct your own research and due diligence.  Here is my logic for these two currencies:

has gotten a free ride from the rest of the world for some time by keeping its currency under tight control.  This makes Chinese goods more attractive to WalMart (NYSE:WMT), Target (NYSE:TGT) and every other US and European retailer.  But it also shifts employment to China and away from other nations.  My guess is that developed nations will face stubbornly high unemployment this summer as yet another high school and university graduating class hits the bricks in search of a real job.  Faced with the conundrum of keeping consumers buying, thus increasing money in circulation and providing jobs in retail, or getting more people off the unemployment rolls, my guess is they will choose the latter.  When that happens, protectionism will rear its ugly head and the Chinese will be forced to revalue the Yuan upward.  It’s a simple premise (some will say simple-minded!) but I’m guessing the Chinese are smart enough to take half a loaf rather than be left with none.

My conclusion regarding the Japanese Yen is even simpler.  With almost no one believing the Japanese economy will ever rebound, and comparisons to Greece (with Japan theoretically twice as indebted as the Greeks) running rampant, it may be time to take a contrary position.  The difference between Greek and Japanese debt is that Greece owes other nations by and large, whereas – by and large – Japan owes its own citizens.  The latter are less likely to “foreclose” upon themselves.  Geographically-tiny Japan is still the world’s second-largest economy, still is home to some of the most innovative companies on the planet, still has some of the most dedicated workers and, if I’m not mistaken, has more investments in China than any other nation.  I’m just not ready to write them off…

For the longer term, I am a buyer of both the Aussie and Canadian Dollar, the former via the CurrencyShares Australian Dollar Trust (NYSEARCA:FXA) and the latter with the CurrencyShares Canadian Dollar Trust (NYSEARCA:FXC).  Neither are cheap but, then, these are long-term plays.  My investment premise here is that these are two nations with massive natural resources relative to the size of their populations.  They produce and will continue to produce far more oil, natural gas, gold, coal, silver, copper and every other store-of-value resource than they can possibly use at home.  And each sits smack-dab next to the biggest possible group of consumers of these resources.  Canada has the US a short train, truck, pipeline or electrical transmission line away, and Australia has Japan, China and India roughly equidistant from its shores. Stunningly high per capita resources geographically convenient to the nations that desperately need these resources. 

Could any two nations be in a more golden catbird seat going forward?  (I’m hoping someone comments that, yes, there are, because I’d be quite willing to consider those currencies, as well!)  In addition to owning for our clients a number of Canadian and Australian companies, with earnings denominated in those currencies, I’m also making a long-term bet that the currencies themselves will rise relative to the US Dollar.  You probably diversify across US asset classes already.  In this Brave New World, I suggest you will need to diversify across currencies, as well.  This is the easiest way I know to do so.

Author's Disclosure: We and / or clients for whom it is appropriate are long CYB, JYF, FXA and/or FXC.

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