ETF Expert

What is an inevitable result of trillions in worldwide stimulus? Money, and/or the easy access to it, finds its way into market-based securities.

In brief, if people can borrow a well-established currency at negligible interest rates, they often invest the proceeds in assets that may appreciate in value (e.g., stocks, commodities); they may also invest in assets that offer higher yields (e.g., corporate bonds, high-yield bonds, higher-yielding currencies, etc.).

In calmer times, the practice of borrowing cheap and investing the money in higher yielding currencies became known as the “yen carry trade.” Japan regularly had the lowest interest rates in the developed world. And the expectations for the yen was for it to remain stable (or weak) due to the country’s dependency on its exports.

Although the yen had always been a favored currency to fund carry trade decisions, in 2009, another well-known currency could now be borrowed for next to nothing. Yep… the U.S. dollar. With the massive fiscal and monetary stimulus executed by the governing powers of the U.S., worldwide borrowers believed they could win twice with a U.S. dollar carry trade; that is not only could you borrow the dollar for next-to-nothing and invest it, the U.S. currency itself would decline in value.

Double victory… or double disaster? In the past, one had to ask how to mitigate the milder risk of an appreciating yen. Yet what might happen if the U.S. dollar strengthened? (The current market sell-off may already be telling us!)

The U.S. Dollar Index has entered an uptrend above its 200-Day moving average. What’ more, the dollar is at 6-month highs. Note: Investors in the U.S. dollar can use/track PowerShares US Dollar Bullish (UUP).

After Dubai scared the world over its desire for debt restructuring, investors began seeking safety in the U.S. dollar. Strangely enough, however, carry-trade borrowers were able to head back to the Japanese yen in December and through the first week of January. Risky assets continued to hit new highs.

However, look what has happened in January. Not only has the U.S. dollar been gaining more traction, but the CurrencyShares Japanese Yen Trust (FXY) bounced off its 200-Day moving average to head higher. This makes borrowing from the yen prohibitive as well.

That only leaves the Swiss Franc as a currency that is well-known… and unlikely to increase in value. Will carry-trade borrowers shift? Or will they ride out the storm before carrying on with any “carry trading” activity?

Here’s a chart for the CurrencyShares Swiss Franc (FXF). At the present moment, it appears to be the only viable alternative.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod. If you’d like to subscribe to ETF Risk Alert, click here.

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