Important Currency ETFs For The Rest of 2013
To clear up that headline, it will not be U.S. dollar or euro ETFs that are addressed here.
Even the Japanese yen will be skirted to some extend. There are plenty of other currencies that can be accessed via ETFs that could present opportunities to investors for the remainder of 2013 from both the long and short sides.
Some of the options presented here can be viewed as obvious choices. Others are potential safe-haven alternatives to the U.S. dollar. While it can be said that currency ETFs are not necessarily as exciting as trading forex in the spot market, they do give investors one more avenue for diversifying away from the U.S. dollar.
Of course that is assuming investors even want non-dollar exposure. That could be a tough sell with the PowerShares DB US Dollar Index Bullish (NYSE: UUP) up about three percent year-to-date. Still, there are some compelling opportunities among forex ETFs to consider for the rest of this year.
CurrencyShares Australian Dollar Trust (NYSE: FXA)
The medium-term outlook for the Australian dollar is something of an enigma wrapped in a riddle. As a commodity-based currency, further weakness for gold could weigh on the Aussie.
As one of the so-called riskier currencies, the Aussie is often used as a gauge of global risk appetite and prolonged weakness in this dollar could be a negative sign of those hoping for a true risk on rally.
Then again, risk associated with the Australian dollar can be overstated. Yes, even the Reserve Bank of Australia has said the dollar is overvalued and the strong Aussie is a legitimate stumbling block for equities in the world's 12th-largest economy.
At the same time, Australia has an AAA credit rating and high interest rates (3 percent) by the standards of the developed world. The U.S. does not have an AAA credit rating and has low interest rates. Same for Japan. Those factors explain, at least in part, why the Australian dollar has been the best-performing developed market currency against the greenback since the global financial crisis and why global central banks continue to gobble up the Australian currency.
As for FXA, a drop below support at $101 would be a sell signal.
CurrencyShares Singapore Dollar Trust (NYSE: FXSG)
The CurrencyShares Singapore Dollar Trust debuted in February and has only nudged higher by 0.11 since then, but there is some potential appeal here. However, perhaps even more so than with FXA, the CurrencyShares Singapore Dollar Trust represents a possible dichotomy.
For starters, Singapore has low interest rates and the central bank there uses exchange rates over interest rate action as its monetary policy tool of choice. The central bank recently pared its 2013 inflation forecast to three to four percent from 3.5 to 4.5 percent, but first-quarter GDP there contracted 1.4 percent, according to the Wall Street Jounral.
Some market participants expect inflationary pressure to tick higher in the second half of this year, but Singapore's dollar does offer one important source of allure: The backing of the city-state's AAA credit rating.
PowerShares DB G10 Currency Harvest Fund (NYSE: DBV)
Amid Japan's weak yen policy, one that appears to finally be working, and inflows to non-easing nations, the carry trade is back. Ordinary investors that do not want to execute their own carry trades in the forex market do not need to fret because DBV is a de-facto carry trade ETF.
The $366 million ETF tracks an index that is "is composed of currency futures contracts on certain G10 currencies and is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates," according to PowerShares.
While DBV can use the entire realm of G10 currencies, its current holdings include long positions of 33.33 percent each in the Australian and New Zealand dollars and the Norwegian krone. DBV's short positions are 33.33 percent each allocated to the euro, yen and Swiss franc. The ETF is up 4.4 percent year-to-date.
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