Asia-Pacific ETFs for Currency Wars
It's not just the Fed. All over the world, central banks are taking action to weaken their currencies as a means of stimulating their domestic economies and protecting exporters. Rampant monetary easing and cutting of interest rates has prompted talk of global currency wars, a scenario under which there will easily defined winners and losers.
That is the rub with currency market. It is the ultimate zero-sum game. In a currency pair such as EUR/USD, things are as simple as the euro being strong and the dollar being weak or vice-versa. There is no middle ground.
Do not expect countries that are currently on the losing end of the brewing currency war to take that position lightly. Previous currency battles have prompted protectionism and capital controls as well as increased tariffs, CNBC noted.
With those ominous warnings in mind, investors need to be aware of how the looming currencies war may impact some of the following ETFs.
iShares MSCI New Zealand Investable Market Index Fund (NYSE: ENZL) Including today's gain of about one percent, which has taken the ETF to a new 52-week high, the iShares MSCI New Zealand Investable Market Index Fund has 5.7 percent to start 2013. ENZL's sturdy performance to start the new year indicates one important factor: Investors are glossing the negative impact the strong kiwi is having on New Zealand's economy.
Simply put, the the strong New Zealand dollar is being blamed for large job losses in the country's manufacturing sector. Executives from New Zealand industrial companies are imploring policymakers there to do something to stem the tide of the rising kiwi, but the Reserve Bank has shown reluctance regarding direct intervention in the currency market.
ENZL continuing rise along with the kiwi seems to be a flawed concept because the ETF devotes over 38 percent of its weight to materials and industrial names, the very companies that would be most adversely impacted by New Zealand's strong currency. If the central bank does take direct action to weaken the kiwi, then ENZL would have a legitimate fundamental catalyst to keep moving higher.
WisdomTree Australia Dividend Fund (NYSE: AUSE) Not too far away from New Zealand, Australia's export-laden economy is attempting to cope with a strong dollar of its own. As a major exporter of coal, iron ore and other commodities, particularly to China, a strong Aussie dollar is not the scenario Australian equity bulls want to contend with.
While the CurrencyShares Australian Dollar Trust (NYSE: FXA) has been mostly lethargic this year, the longer term trend for the Aussie dollar, particularly against its U.S. rival, has been higher due in large part to Australia being home to higher interest rates. The Reserve Bank of Australia has cut rates by 175 basis points to three percent since late 2011, but even Prime Minister Julia Gillard has warned the strong dollar could persist.
That could put AUSE in play as a preferred way of accessing Australian equities. The rival iShares MSCI Australia Index Fund (NYSE: EWA) allocates about a third of its weight to export industries such as materials, energy and industrials. On the other hand, AUSE offers a bit more of a domestic focus as financials, discretionary and staples names combine for 53 percent of that fund's weight. Plus AUSE has a 30-day SEC yield of 4.46 percent.
As has been noted time again during its recent surge, DXJ offers not one, but two advantages. First, the ETF screens its constituents to include companies that derive the bulk of their revenue outside of Japan. Second, the fund exposure to fluctuations between the value of the U.S. dollar and the Japanese yen. Those points mean DXJ flourishes in a weak yen environment without necessarily needing Japan's domestic economy to immediately improve.
Over the past three months, DXJ has also proven to be a better bet than shorting the CurrencyShares Japanese Yen Trust (NYSE: FXY). FXY is down 13.8 percent in that time, but DXJ has jumped 24.8 percent.
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