As the currency hedged equivalent to EEM, DBEM features heavy short exposure to the currencies of China, South Korea, Taiwan and Malaysia, among others. Those countries combine for about half the ETF’s weight.
Predictably, China looms large in the equation. The yuan has been sturdy this year, making the short dollar/long yuan carry trade popular on currency desks. However, as Azous notes, “some paid forecasters are now arguing publicly that they dislike this short carry strategy,
some commentators are starting to argue that China has to enter the currency war by weakening the Yuan, and investors are becoming concerned that more policy easing in China will unleash a similar outcome this upcoming January to what happened last January, when many people got rinsed in this core carry position.”
China recently lowered interest rates and if that policy continues and/or the People’s Bank of China intervenes to weaken the yuan, DBEM stands to benefit.
Solidifying the thesis that weakening Asian currencies could serve as a catalyst for some upside for DBEM is the nearly 5% three-month loss for the WisdomTree Emerging Currency Strategy Fund (NYSEArca: CEW). That ETF allocates over 47% of its weight seven emerging Asia currencies. [Currency Concerns for EM ETFs]
Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF
