ETFs for Latin America Currency Interventions (CCX, GXG)
From Shanghai to Jakarta, emerging markets and the ETFs that track them have experienced difficulties in recent months. One issue plaguing developing markets, particularly the BRICS quintet, has been volatility among domestic currencies.
With global growth expected to remain sluggish, many export-dependent developing nations may seek to intervene in currency markets to support domestic commodities producers and industrial firms.
A research note published Friday by Bank of America Merrill Lynch Latin America fixed income strategists indicates that regions' central bankers could act to weaken currencies, so as to bolster domestic exporters.
As a result of the sheer size of the forex market, central bank interventions have had a mixed history of effectiveness. Regardless, potential upcoming interventions make the following ETFs worth watching.
WisdomTree Dreyfus Commodity Currency Fund (NYSE: CCX) The WisdomTree Dreyfus Commodity Currency Fund is not a pure play on emerging markets currencies, as the fund includes exposure to the Norwegian krone and the Australian, Canadian and New Zealand dollars.
Still, Chile, Russia, South Africa and Brazil combine for almost half of the fund's weight. BofA Merrill Lynch said in the note that Brazil's central is looking to keep the real weak.
"[Brazilian] economic activity has surprised on the downside since the beginning of the year, with industrial production contracting in four of the last seven months and the Brazilian Central Bank activity index decelerating to 1.40% yoy in May, down from 2.40% yoy in January," according to the note.
With an eye to Brazil's intervention efforts, investors may also want to track the WisdomTree Dreyfus Brazilian Real Fund (NYSE: BZF). BZF has slid almost four percent in the past three months.
iShares MSCI All Peru Capped Index Fund (NYSE: EPU) Peru's status as a major producer of copper, gold and silver makes the sol's relationship with the U.S. dollar one to watch. The central bank has engaged in a doll-buying program as the sol has gained steam in recent weeks.
Peru's central bank meets next week and BofA said it expects rates to remain unchanged at 4.25 percent. BofA noted, "We expect the trade balance to improve from the May print, but still show a deficit. We point to the deceleration in mining production as the main cause."
Global X FTSE Colombia 20 ETF (NYSE: GXG) The Global X FTSE Colombia 20 ETF has been one of the top-performing Latin America ETFs this year, gaining just over 15 percent. A decision by Colombia's central bank to lower interest rates by 25 basis points this week caught some investors off guard. Growth is slowing slightly in Colombia, South America's third-largest oil producer, but BofA expects the central bank "will emphasize that deceleration has been driven mainly by external factors and that internal demand remains strong."
The note added that the next move by Colombia's central bank may not be another rate cute, but rather intervention in the forex market "targeted at the tradables sectors which are being hurt by both the slowdown and the appreciation [of the peso.]"
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