May 6, 2010 – Time to Play the Minor Asian Currencies

Featured Trades: (CYB), (AYT)

4) Time to Play the Minor Asian Currencies. Long time readers of this letter know too well that I have been yammering on for some time now about the need for China to revalue the Yuan (CYB) (click here for my opus on the 30 year trading history of the Chinese currency). When I look at their trade and current account surpluses and the reserves that are piling up, it is amazing to me that they have been able to put it off for so long. It is bizarre that a country that now has a $5 trillion GDP, the second largest, and accounts for 9% of world GDP, still has a fixed exchange rate. But the Chinese can be an incredibly stubborn lot, as the few 'Long March' veterans I have run into over the years used to remind me. Some hedge fund managers are not so patient. No doubt some of the strength of the 'dollar bloc' currencies of Canada and Australia is due to white hot growth rate in China, which is dragging the economies of its big resource providers along with them. This is why these countries are raising interest rates faster than anyone else, widening spreads against the US dollar and the yen. Now, some hedge funds have found another back door into a Yuan hike. They have been picking up the currencies of other smaller emerging markets that surround China and will also benefit from a continuing boom. That includes the Malaysian ringgit, which is up 7.5% YTD, the South Korean won, up 5% YTD, (click here for my piece), and even the Indian rupee, up 5% YTD. Big funds execute these trades on the interbank market. They are somewhat more difficult to put on for individual investors, as there are no easily accessible futures contracts or dedicated ETF's, yet. Single country ETF's would catch the currency moves, but still leave you with the equity risk. Your best choice then is the Barclays Gems Asia 8 ETN (AYT), which is made up of a basket of currencies, including the Indonesian rupiah, Indian rupee, Philippine peso, South Korean won, Thai baht, Malaysian ringgit, Taiwanese dollar, and Chinese Yuan. Look at it as a generalized bet on the long term growth of the whole region, ex Japan.