While the U.S. dollar has swung lower on the lower economic outlook, the greenback is still more likely to appreciate against foreign currencies than weaken ahead, potentially weighing on international stock exchange traded fund investments.
“Fundamentally, nothing has changed,” Robert Bush, Investment Strategist at Deutsche Bank, told ETF Trends.
While the equity forecast is slightly lower due to the weaker global economy, the fundamentals in the currency markets still support an appreciating dollar and depreciating foreign currencies. The ongoing accommodative measures and quantitative easing will continue to weigh on foreign currencies like the euro, Japanese yen and even Chinese yuan while Federal Reserve tightening will support the greenback.
ETF investors can access currency hedged strategies on these three markets through the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP), Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) and Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (NYSEArca: ASHX).
Other regional issues may also affect currency moves. For instance, the so-called Brexit, or Great Britain’s potential departure from the European Union, could weigh on the British pound sterling. Investors can hedge any further weakness in the GBP with the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK). [“Brexit” Would Punish This ETF]
However, Bush argues that while the euro has more room to devalue, the Japanese yen has less room to fall. Consequently, the strategist suggests investors may want to unwind the Japanese yen hedge.
With the Bank of Japan and other large institutions still piling into Japanese equities market through the JPX-Nikkei 400 Index, investors may also turn to a non-hedged ETF that tracks the same index, the Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN). The JPX-Nikkei 400 Index was launched in January 2014 as a means of revitalizing the Japanese equity market. The Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies. [Japan ETFs: Don’t Bet Against the BOJ]
Still, it is hard to accurately predict the direction these currencies may take, as we recently witnessed.
“It is difficult to pin point directional bets,” Kize Behrends, ETF Regional Vice President at Deutsche Asset & Wealth Management, told ETF Trends. “There is a whole slew of advisors who haven’t taken a stance.”
Consequently, Behrends suggests taking a half hedged approach. For instance, investors interested in Japan may use the Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity ETF (NYSEArca: JPNH) along side a JPN position.
Max Chen contributed to this article.