Market Overview

An ETF For Legitimately Strong Dollars

An ETF For Legitimately Strong Dollars

With speculation rampant that the Federal Reserve may ease or halt its bond-buying activities known as quantitative easing, the U.S. dollar gotten a lift in the past two trading sessions.

Actually, the U.S. Dollar Index (DXY) is riding a multi-week winning streak and the PowerShares DB US Dollar Index Bullish (NYSE: UUP), the DXY tracking ETF, has been a solid performer this month.

Those factors do not obfuscate the fact that the Fed's money-printing efforts have heaped more pressure on the greenback, which was already weakening long before Chairman Ben Bernanke iniated quantitative easing.

Still, the U.S. dollar is considered one of the world's reserve currencies and that is even with the loss of the AAA credit rating. The other four reserve currencies are the euro, British pound, Japanese yen and Swiss franc.

The International Monetary Fund is expected to add the Australian dollar to the group of reserve currencies in the coming months, a perhaps superficial honor, but one that does reaffirm the notion that the Aussie is one of the world's stronger currencies.

"While this doesn't necessarily create a catalyst for investment, it does validate the perceived strength and stability of Australia's currency and financial system by global decision makers," said WisdomTree Portfolio Manager Rick Harper in a research note. "Indeed, the term ‘reserve currency' stems from these government holdings (such as bonds) being held as reserves at central banks around the world. Taking the interpretation a step further, in the eyes of these government officials, the Australian dollar could increasingly be viewed as a long-term store of value."

Aside from a currency ETF, investors can tap the Aussie dollar's strength and the country's AAA credit rating, something only Switzerland has of the current reserve currency nations, with the WisdomTree Australia & New Zealand Debt Fund (NYSE: AUNZ).

The $71.2 million ETF invests in Australian and New Zealand sovereign debt with a bias toward the former, which accounts for just over 74 percent of the fund's total weight. That means AUNZ offers investors some degree of safety without the outright sacrifice of yield found with U.S. Treasuries.

For example, the iShares Barclays TIPS Bond Fund (NYSE: TIP) has a 30-day SEC yield of negative 3.8 percent. AUNZ's 30-day SEC yield is 2.89 percent.

Harper notes the Australian dollar's potential move to reserve currency status could see investors increase their allocations to the currency.

"We believe that increased tracking of the Australian dollar as a reserve currency could pave the way for an increasing allocation in investor portfolios," Harper said in the note. "For 2013, we believe that many of the compelling reasons investors and sovereign wealth funds bought Australian debt in 2012 could continue to provide opportunities in the first half of 2013."

While it should be noted the Reserve Bank of Australia has slashed the country's overnight cash rate by 175 basis points to three percent since late 2011, RBA has not engaged in Federal Reserve or Bank of Japan-style monetary easing. Nor has the Reserve Bank of New Zealand.

In the case of RBNZ, only recently has the central bank shown signs of intervening in the forex market to weaken the kiwi.

Not surprisingly, the Australian and New Zealand dollars have been the best-performing developed market currencies against the greenback since late 2008. While there have been plenty of calls that both the Aussie and kiwi are overvalued relative to the greenback, some market participants see further upside.

Earlier this week, Kerry Series, founder and chief investment officer at Eight Investment Partners, told CNBC the Aussie could trade up to $1.20-$1.30 against its U.S. rival. In the CNBC interview, Series cited the Aussie's correlation to Asian equities and noted that those stocks "are undervalued by at least 20 percent."

That type of appreciation would benefit AUNZ, though the ETF could also get some help from New Zealand as well. While RBNZ may intervene in the forex market, currency interventions rarely have the desire impact. Additionally, an interest rate increase in New Zealand is seen as more probable than a cut over the next months.

More importantly, RBNZ Governor Graeme Wheeler has ruled out money printing or quantitative easing.

Those factors bode well for AUNZ, which features an expense ratio of 0.45 percent and an average duration of four years.

For more on foreign currencies and ETFs, click here.

Posted-In: Long Ideas News Bonds Short Ideas Specialty ETFs Currency ETFs Forex Events Best of Benzinga


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