In our post “Fun with Francs” on August 10th, I said:
If you think the Swiss enjoy their currency at these levels, forget it. They will probably be working hard to get its value down.
This article from Bloomberg speaks directly to the angst the strength in the Swiss Franc is causing in the Alps. The industrious Swiss will be doing their best to get the value of their currency down.
If you’ve followed Paladin Money for a while you’ll know that it is my opinion that — and certainly this is true in 2011 — currencies other than the dollar offer significant return potential. I’d add that, if like some of us, you liquidated some of your portfolio before the current calamity, you probably have some cash sitting around. All I’ll remind you is that being cash doesn’t have to mean being in dollars. Search our site on “currencies” and you’ll find our prior pieces.
The Swiss Franc is currently everyone’s darling. While FXF, unlike some of the other Currency Shares ETFs, doesn’t pay interest, had you invested in it at the turn of the year you would now be looking at a 28.04% return. If you had invested on 7/22, immediately before the current sellapolooza started you would have made 12.43% while the S&P is off 16.67% in the same period.
Caveat: If you think the Swiss enjoy their currency at these levels, forget it. They will probably be working hard to get its value down. Easier said than done right now, but just be aware of it. That is also like saying that gold at ~$1,800 is too much. It may be, but there are buyers at that price.
So, the message is not so much that you should buy FXF (I don’t give investment advice, ever. We just educate, inform and hopefully, sometimes amuse.) as that you should be aware of opportunities in currencies other than the dollar, without having to indulge in Forex trading. In that case you may also find Everbank’s site of interest.
On May 3rd I wrote an article Currencies for profit without tears. On June 2nd I suggested compiling a D-I-Y currency ETF containg FXF, FXE and FXS. Two of those ETFs are losers since then but you would still have a 4.8% gain to compare to the S&P’s 1.57% loss in the same period.
I have updated our performance maps which include the SPDR Sector ETFs (nothing exciting there) and our currency ETFs (which you should review).
For the year the S&P is carrying a 2.75% gain. EVERY currency ETF I track would have beaten the S&P with the exception of the $US. Some by a lot. Swiss Franck FXF +18.39%, Russian Rouble XRU +10.34% and the good old Euro FXE +7.55%. And that’s only the capital gains. These ETFs pay interest every month, check them out at Currency Shares.
It gets even better in July. S&P? Minus 2.15%. Swiss Franc FXF? Up 6.86% Japanese Yen FXY? Up 4.59%.
Are you guaranteed a profit in currency ETFs? Of course not. But with a bit of judicious background reading you should be able to figure out how to profit from the hard work our “leaders” in Washington are doing in their seemingly never-ending quest to destroy the Dollar.
Jim Cramer likes to say that “there’s always a bull market somewhere”. While he may be a bit loud for my tastes, in that, he is correct. In a difficult market it takes work to turn a profit and right now one of the clearest opportunities is in the commodity corner. I have some commodity ETFs set up in a watchlist in TC2000, which has become a real tool for me, so much more than a charting tool. I have set an indicator which clearly shows me which symbols are above their 50-day SMA, and how far above their 200-day SMA they are. It’s a quick and easy visual screen:
I set most of these mock positions up on May 22nd, so the gains for PALL (palladium) and SGG (sugar) at +9.84% and +8.62% respectively are nothing to sneeze at for eleven trading days! I’ll take those numbers any day. PALL has the more spectacular chart, has cleared its 200, 50 and 20-day SMAs and broke resistance today. There may be another 5% to be made here:
Perverse as I am in these matters, I actually like SGG’s chart a little better. Nice steady march upwards and with a greater upside potential in my opinion. The commodity traders almanac tells us that historically sugar starts a 32-day bull run on or around June 15th so maybe we started early this year. Also remember that like corn, ethanol has tended to push sugar prices up. Still below the 200-day SMA so it looks as if SGG has room to run. Closed at $78.14 today, SGG was at $40.60 a year ago. I’m telling you that so you’re mindful of setting your exit and stops.
In closing, let me add that you should not ignore currency ETFs right now either. I put real money, equal dollar weight into FXE, FXS and FXF two trading days ago and am up 0.39% so far. Big deal you might say, but I am on line for my 1% a month that compounded will work for me. (Don’t forget I’m also earning interest on two of these on top of capital gains. Not much, but it all helps.)
There are regular risk opportunities in the financial universe, and there are those that have, well, a bad reputation. Typically, commodities cause strange sideways looks from other folks, and there is always someone whose relative has lost his shirt in pork bellies. Of course, it isn’t the commodity that’s the problem. It’s the leverage that’s usually employed in investing or trading in it.
But if commodities have a rather negatively skewed reputation, albeit undeserved, in my opinion, currency or FOREX trading is worse. The problem with currency trading is, the number of people offering to let you trade currency pairs, or open a toy money practice account on their dime is legion. One can barely go to any financial site without finding at least one solicitation from a FOREX trading house. It’s grossly unfair on my part but I somehow feel as if I am being importuned from the doorways of shady nightclubs having taken a wrong turn onto a street in the bad side of town.
Which is not to suggest that those running FOREX trading houses are doing anything wrong. I have a currency trading account on thinkorswim, it’s funded on the off chance I may make a trade, but it’s not something I plan to do. I also once did very well paper trading on another FOREX site but realized it was luck not skill, pocketed my make-believe winnings and had the good sense to quit while I was ahead.
Now, do some folk do well trading FOREX pairs? Yes. But I believe the statistics will tell us that most folk — the vast majority — lose and give up. Rather like commodities, it’s the leverage that causes the problem. I might add that Marketclub does track currency pairs and ranks them all with their trade triangle technology.
Does this mean that we should avoid currency trading and investing altogether? Absolutely not! In fact, I think the well-rounded portfolio should have some element of currency investing in it some of the time. The best way for most folk to do it, though is in ETFs and in unleveraged ones at that.
ETFdb.com lists thirty long, unleveraged currency ETFs. There are only six leveraged and leveraged inverse currency ETFs and they all focus on either the Yen or the Euro. Of thethirty ETFs listed as long, unleveraged ETFs, I am going to confine this review to the nine ETFs offered by CurrencyShares :
And two US dollar index ETFs offered by Powershares, one long, one inverse with the tickers UUP and UDN respectively. The table is as at the close on May 2nd 2011.
You might think that unleveraged currency ETFs would not offer much in the way of returns, but this is not the case. These returns on the CurrencyShares ETFs are through the end of April 2011:
To me, the ringer here is the Swedish Krona, but the fact is that we have annual returns exceeding 20% in three of the nine currencies represented with YTD returns exceeding 10% in three of the nine ETFs too. While most of the work may have been done by the dollar going down, these are potential returns that are hard to ignore. The CurrencyShare ETFs also pay monthly interest if interest income exceeds fees — rather like a currency money market account but without the financial guarantees.
But how should one gauge entry and exit points? This largely depends on how much trading one wishes to engage in. For example, in MarketClub’s World Cup portfolio, which trades the spot dollar index long and short (UUP would be a proxy), the monthly green and red “Trade Triangles” are used for trend and the weekly green and red “Trade Triangles” for timing. entries and exits. A similar methodology is used in MarketClub’s Perfect R portfolio, which only uses long (or sidelines) positions in four ETFs. In this case the portfolio uses the FXE Dollar/Euro ETF from CurrencyShares. We’ll come back to FXE in a little while.
One very simple but effective methodology to trade the longer term trends in these currency ETFs would be to use 200-day moving average crossovers to determine entry and exit points. You may have a few unnecessary trades where the instrument crosses its trend line a few times in fairly close succession, but generally I think you would be pleased with the results.
