The WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW) accesses “non-deliverable” forward (NDF) exchange contracts, and the fund captures the broad and sudden shifts of investor sentiments in the emerging currencies market, writes Rakesh Saxena for Seeking Alpha.

CEW fund provides access to the short-term money market in the emerging markets without encumbering investors with possible settlement risks. It is noted that only those comfortable with foreign exchange risks should be investing in this type of fund. (More on currency investing in our special report).

Potential traders should also note that NDF contracts incorporate interest rate differentials and speculative orders, which means that during stressful times in the financial markets, the exchange rates available in the NDF market are more accurate than the official quotes from emerging market banks.

NDF contracts are essentially outright forward exchange contracts with profits and losses adjusted between two counterparties based on the difference between the contracted and spot rate on the contract maturity date. (More on forward contracts can be found here).

Why is a basket of currencies beneficial?

• Emerging markets can be volatile; currency basket ETFs can give you broad exposure to a range of currencies and mitigate your overall risk. (More on emerging markets here).
• They are lower-correlating assets. The currencies in emerging markets generally move independently  of other domestic investments and alternative asset classes, such as commodities.
• They’re another way to access the overall growth of a currency category; in this case, emerging markets.

For more information on world currencies, visit our currency category. Or take a look at our ETF currency guide for currency ETF selections.

• WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW): up 5.9% since inception; currencies include Mexican peso, Brazilian real, Chilean peso, South African rand, Polish zloty, Israeli shekel, Turkish new lira, Chinese yuan, South Korean won, Taiwanese dollar, Indian rupee

Max Chen contributed to this article.

• The country’s purchasing managers’ index rose the most in 17 months, reports Nasreen Seria of Bloomberg. The seasonally adjusted index increased to 48 last month from 39.3 in August. This is huge for South Africa, because manufacturing production accounts for 14% of its economy.
• The sub-index, which measures business activity, jumped to 49.4 last month from a 38.3 in August.
• New sales orders rose to 50.7 from 39.5 and manufacturers are starting to increase their inventories.
• The pace of job cuts may have also eased with the unemployment sub-index rising to 42.7 from 37.5 in August.
• The nation’s currency has been gaining ground on the dollar, surging 39% since March. The WisdomTree Dreyfus South African Rand (NYSEArca: SZR) is up 33.8% year-to-date.

South African state-owned companies may increase bond sales to finance more than $78.5 billion for infrastructure expansion over the next five years as government revenues were hit hard in the recession, reports Garth Theunissen of Bloomberg.

To grab direct exposure to South Africa, take a look at the iShares MSCI South Africa Index Fund (NYSEArca: EZA), which is up 43.4% year-to-date. (For more ways to get exposure to Africa, go here).

For more stories on South Africa, visit our South Africa category.

Kevin Grewal contributed to this article.

The dollar has taken a hit over the past few months and many currency experts believe that it will continue to remain weak because American consumers aren’t feeling confident,  U.S. policymakers want to keep U.S. goods cheap to entice foreigners to buy more of our stuff and the ballooning of the U.S. budget deficit, states Gary Gordon at ETF Expert.

As a result of the aforementioned, 12 out of the 14 “pure play” currency ETFs are trading above their 200-day moving averages and most have year-to-date gains. (The two exceptions are the PowerShares DB U.S. Dollar Bullish (UUP) and the CurrencyShares Mexican Peso (FXM)).

To play currencies, mind the trend lines and have an exit strategy if you’re invested.

Some of the best performing currency ETFs include:

• CurrencyShares British Pound Sterling (FXB): up 12.5% year-to-date

• WisdomTree South African Rand (SZR): up 26.2% year-to-date

• WisdomTree Brazilian Real (BZF): up 20.1% year-to-date

For more information on currency ETFs, take a look at our special report on currencies and visit our currency etf category.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Kevin Grewal contributed to this article.

South Africa’s government policies won’t be drastically changed as Pravin Gordhan becomes the new Finance Minster and Trevor Manuel is now head of  a planning commission, reports Nasreen Seria for Bloomberg. The financial markets are relieved after hearing about the appointment of Gordhan, who previously tripled tax collection in a decade as head of the South African Revenue Services.

It may still be too early to consider raising South Africa’s credit rating since the economy is projected to contract for the first time in 17 years with high unemployment rates.

The South African rand depreciated against the dollar after news of a change in the Finance Ministry and on possible ongoing slowdowns in the economy, write Janice Kew and Garth Theunissen for Bloomberg. It is also thought that the rand will further depreciate based on fundamental reasons.

A report is due to come out in which the manufacturing sector, which is 16% of South Africa’s economy, may have continued to drop on diminished demand for vehicles and commodity goods.

• iShares MSCI South Africa Index (EZA): up 12.7% year-to-date
  

• WisdomTree Dreyfus South African Rand (SZR): up 15% year-to-date

Max Chen contributed to this article.

Growth was almost at a standstill at an annualized 0.2% for the third quarter, which is the slowest pace in more than a decade. A recovery is not in the near future as the global credit crisis has taken away the demand for platinum and gold, report Nasreen Seria and Mike Cohen for Bloomberg.

The good news is for the South African rand, which has rallied to its highest level in three weeks after the Federal Reserve announced the $800 billion plan.

The plan is intended to thaw credit markets and create liquidity, which in turn has fueled demand for higher-yielding currencies, reports Garth Theunissen for Bloomberg.

The South African rand has advanced to a two-week high and has gained against United States and European markets. In turn, the FTSE/JSE Africa All Share Index was up 6.9%, the biggest jump since October.

• WisdomTree Dreyfus South African Rand (SZR), down 17.6% since July 8 inception

• iShares MSCI South Africa (EZA), down 47.3% year-to-date

In the second quarter, the country’s unemployment rate fell to 23.1% and economic growth rebounded from a six-year low, reports Nasreen Seria for Bloomberg. Economic expansion hit an annualized 4.9%, up from 2.1% in the previous three months.

Employment within the mining sector rose the highest, by 3.9%, while transportation industry employment rose 3.6%. Unfortunately, Africa’s largest economy hasn’t increased jobs at a fast enough pace to slash unemployment, which has led to a rise in both poverty and crime. Skilled workers are in short supply, as well, making the government’s goal of slashing unemployment to 14% by 2014 a tough one to attain.

Inflation remains high: it hit 13% in July, up from 11.6% in June.

The rand is also up against the U.S. dollar for the second consecutive day. A weaker dollar helped lift demand for precious metals. South Africa produces 80% of the world’s platinum and 10% of the world’s gold, which tends to cause the rand to move in tandem with metals, report Mike Cohen and Garth Theunissen for Bloomberg.

• NETS FTSE/JSE Top 40 Index (JNB), down 18.1% since May 22 inception
• iShares MSCI South Africa (EZA), down 16.4% year-to-date
• WisdomTree Dreyfus South African Rand (SZR), down 1.1% since July 8 inception

However, it is important to understand and know what to expect from currency ETFs before investing in them, as Anthony Welch for Index Universe explains.

Welch first points out that currency ETFs are not substitutes for money markets. Currency ETFs can and often do fluctuate in value, despite most of them paying monthly interest.

Similarly, currency ETFs are not substitutes for bonds. This is because bonds have a fixed date where an investor expects a return of principal. Meanwhile, currencies can decline for long periods of time and possibly never get back to the highs they once achieved. As a result, currencies are not something investors can buy and hold in the long run with a true degree certainty.

Currencies are also not similar to stocks. The currency market is enormous, being that currencies trade 24 hours a day and represent all the money in the world in a sense. Unlike most stocks, many currency traders have reasons to trade without the intention to make money, but rather to hedge risk.

Although currency ETFs are not like money markets, bonds, or stocks, they are very simple. Currency ETFs are nothing more than a relationship between two currencies, one of them usually being the U.S. dollar. These relationships fluctuate based on an extenuating number of circumstances ranging from interest rates, political climate and economic and GDP activity.

Some of the many Currency ETFs include:

• CurrencyShares Australian Dollar Trust (FXA), up 3.3% year-to-date
• CurrencyShares Euro Trust (FXE), up 4.2% year-to-date
• WisdomTree Dreyfus South African Rand (SZR), down 1% since July 8 inception
• WisdomTree Dreyfus Japanese Yen (JYF), down 4.5% since May 22 inception
• PowerShares DB US Dollar Index Bearish (UDN), up 1.9% year-to-date
• PowerShares DB US Dollar Index Bullish (UUP), down 0.4% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of UUP.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.