One of the easiest ways to jump-start economic growth is to make your currency weak. But in a market that’s all about relativity, what happens when everyone starts doing it?
For developed economies, a weaker currency allows the currency to easily unload exports and even debt onto the international markets, writes Sara Churchville for Minyanville. Unfortunately, as a result of the economic downturn, every country wants a devalued currency compared to their peers because the country with the most devalued currency will win in the exporting game.
Countries, namely the United States, have shown their displeasure with the Chinese keeping the yuan at an artificial exchange rate, but with a copious amount of yuan floating in the foreign exchange, China will likely start strengthening its currency or change its export model. [Chinese Yuan ETFs: Waiting on Gains.]
How are you supposed to play currencies when everyone’s busy making them weak?
Due to the quantitative program last fall, global investors dumped U.S. assets and poured into China, reports Charles Wallace for Daily Finance. Meanwhile, China printed more yuan to match the dollars from exporters and banks to maintain its exchange rate with the U.S. However. But a record trade surplus caused the yuan supply to surge 19.7% in December, resulting in an inflation spike.
China will either impose price controls, which is a short-term solution, or raise the value of its currency, which will likely be China’s course of action.
If that happens, WisdomTree Dreyfus Chinese Yuan (NYSEArca: CYB) and Market Vectors Chinese Renminbi/USD ETN (NYSEArca: CNY) are the most direct plays.
Mauro Roca, emerging markets currency strategist at Deutsche Bank, remarks that emerging market countries “are increasing the amount of capital controls and direct intervention in order to temper currency inflows and reduce the effect of these flows on currency appreciation,” writes Charles Wallace for Daily Finance.
It’s also a mistake to believe that all currencies are weak. CurrencyShares Swedish Krona (NYSEArca: FXS) and CurrencyShares Mexican Peso (NYSEArca: FXM) are actually two of the best-performing currency ETFs year-to-date.
There are also opportunities in high-yielding currencies, such as the CurrencyShares Australian Dollar (NYSEArca: FXA) and the WisdomTree Dreyfus Brazilian Real (NYSEArca: BZF).
For more information on world currencies, visit our currency ETFs category.
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.
Max Chen contributed to this article.