Currency Trading: The New Global Investing Game, Part 2

With global financial markets suffering their first major correction since March of 2009, global investors once again are on the hunt for safe-haven assets. While the most risk-averse U.S. investors may park their money in cash through the use of exchange-traded funds (ETFs) or even multi-currency bank accounts, you now can keep your cash in currencies other than the U.S. dollar. This week’s Global Guru examines the investment case for currencies in the world’s developed economies, in addition to the major reserve currencies we discussed last week.
CurrencyShares Australian Dollar Trust (FXA)
The Australian dollar — much like the Canadian currency — is viewed widely as a commodity currency. The equation is pretty simple. When commodities soar, so does the Aussie dollar.
But the Aussie dollar has had a strong run until recently for other reasons, as well. With China buying up Australia’s raw materials to feed its relentless growth, the Australian economy has quickly emerged from its slump. A rebound in consumer confidence, higher housing prices and the manufacturing index all have signaled a strong recovery in Australia’s economy. As a result, Australia’s Central Bank has been raising interest rates, making the Aussie dollar one of the highest-yielding currencies in the world.
But the Aussie dollar has taken a hit in recent weeks. Commodity prices have fallen and fears have grown that the impact of stimulus packages in Asian economies is fading. And a proposed mining profits tax on large Australian companies like Rio Tinto may force business to scale back its activities in the “lucky country.”
CurrencyShares Canadian Dollar Trust (FXC)
For most of your lifetime, the Canadian dollar — “the loonie” — has been a poor cousin to the Greenback, consistently trading below parity. Yet, earlier this month, the value of a Canadian dollar once again almost exceeded that of its U.S. cousin.
Much like the Australian dollar, the Canadian dollar has always exhibited very strong correlations with oil, gold and other raw materials.
But there’s more to the loonie’s strength today than commodity prices. If Canada seemed a bit boring over the past decade, the conservatism of its financial system compared to its neighbor to the south now seems like a virtue. Canada’s per capita debt is less than half that of the United States. Among the major global currencies, the Canadian dollar held up the best during the sharp sell-off in the markets. Given its relatively limited housing bubble and low level of consumer debt, over the next few years, the Canadian dollar may prove to be the surprising, big winner in the global currency game.
CurrencyShares Swiss Franc Trust (FXF)
The Swiss franc, the “Swissie, still conjures up images of safety and security in the minds of global investors”. That’s more image than reality, as the “gnomes of Zurich” carry a lot less weight in the 21st century than when James Bond was catching bad guys in the 1960s while skiing on the Swiss pistes.
More than simply a safe-haven currency, the Swiss franc traditionally has offered investors an indirect way to play interest rates. There always had been a strong correlation between the 10-year bond yield and the Swiss franc. The value of the Swissie often rose and fell with bond yields. Investors in the Swiss franc often offset stock-market losses with gains in the Swiss currency, allowing the currency to act as a hedge against falling stock prices.
That correlation broke down in the most recent sell-off as the Swiss franc has fallen against the U.S. dollar, along with all other major currencies. Possible major losses at highly leveraged investment banks like UBS and Credit Suisse, combined with the fact that the Swiss currency now is no longer fully backed by gold, have impaired the Swiss currency’s safe-haven status.
CurrencyShares Swedish Krona Trust (FXS)
The euro, sterling and the Swiss franc dominate talk of Europe’s currencies. But with the euro getting hammered, the British pound wracked by uncertainty, and the Swissie losing its safe-haven status, the Swedish krona may attract more investor attention in the future.
Unlike most of the European continent, Sweden has refused to outsource its monetary policy to the European Union by adopting the euro. As a result, the Riksbank– the Swedish Central Bank — is not straight-jacketed into the “one-size-fits-all” monetary policy of the eurozone. An additional benefit? While there is a chance that the euro may disappear altogether, the Swedish krona is around for the long term.
Sweden’s economy was affected severely by the Great Recession as Swedish GDP dropped 4.9% in 2009 — the largest annual fall since World War II. But today, the labor market is recovering, and consumer confidence recently rose to its highest level since August 2007. The Riksbank now estimates that the Swedish economy will increase by 2.2% this year and by 3.7% in 2011 — considerably more than in the rest of Europe.
Over the past year, the Swedish krona traded pretty much in line with the euro — until the euro crisis started hitting the headlines. Since then, it’s been as strong a currency as the Swiss franc.
Currency Trading: Applying the Lessons
Few of these currencies look spectacular compared with the U.S. dollar over the past year or so. The U.S dollar has rallied strongly in 2010, thanks to (relatively) strong U.S. growth. And when risk aversion jumps, global investors still rush to the U.S. dollar as a safe haven. But understanding that the “cash” of other countries is a legitimate investing option can give you a huge edge in playing the new global investing game.
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