ETF XRAY

Currency Moves Impact South Korean ETF (EWY) and Taiwan ETF (EWT)

By Carl Delfeld of the Chartwell ETF Advisor and Chartwell Partners Asset Management

Because country exchange-traded funds are not hedged against the U.S. dollar, dollar returns for these ETFs are affected by currency movements.

A good example is the Taiwan ETF (EWT) and the South Korean ETF (EWY). The Taiwanese dollar has appreciated by 6.5% since the start of the year, buoyed by last month’s elections which installed the opposition Kuomintang candidate as President with a high likelihood of improved relations with China. One example, Mr. Hu Jintao is scheduled to soon meet with the Taiwan's VP-elect Vincent Siew on the sidelines of a forum in Hainan.

In comparison, the Korean won has depreciated by 4.6%. The Financial Times reports that the countries’ respective balance of payments go some way towards explaining this. While Taiwan’s current account surplus widened to just over 8% of GDP at the end of last year, Korea sank into a deficit. Foreign investors have been selling Korean equities since the middle of last year. For some time, that was offset by fixed income inflows by Koreans borrowing offshore.

Politics will also play a role. Korea’s newly-installed president has pledged to lift economic growth, meaning the central bank may err more towards keeping the currency weak. Taiwan's new government may open the throttle.

Should Taiwan or South Korea be in your global ETF portfolio? Join Chartwell ETF for guidance.

UK and Dollar Go One Way, Euro and Asian Currencies Another

By Carl Delfeld of the Chartwell ETF Advisor

While the dollar and the pound are falling in part due to interest rate cuts, the euro as well as most Asian currencies are rising. Stronger Asian currencies are part of Chartwell's "Asian tilt" strategy as it selects exchange-traded funds for portfolios such as its Country ETF Rotation ETFfolio.

The Bank of England’s monetary policy committee cut interest rates from 5.25% to 5% to offset the effects of a consumer and property slowdown. The pound sterling dropped to a fresh record low against the euro. The European Central Bank, unlike the Federal Reserve and the Bank of England, has so far refused to cut rates in the face of the turmoil on global financial markets.

Meanwhile, currencies across Asia are rising. The Singapore dollar hit a record high of S$1.36 to the US dollar after the city-state tightened its monetary policy in response to an unexpected jump in first-quarter economic growth that raised inflation fears. The Singapore dollar has gained about 5% against the US dollar this year helping the Singapore ETF (EWS) gain ground.

The Singapore economy grew at an unexpectedly high rate of by 7.2% in the January-March period from a year ago, according to a preliminary estimate.

Moving to China, the renminbi strengthened beyond Rmb7 to the dollar for the first time since 1994 as China’s economic growth speeds on under inflationary pressure. This is good news for the new renminbi/USD ETF (CNY) which Chartwell recently added to some of its ETFfolios. Andrew Wood of the Financial Times notes that while the Shanghai stock market – which has fallen by 34% in value so far this year – took the news of the crossing of the Rmb7 to the dollar barrier in stride. The Shanghai composite index gained 1.7% to 3,471.

The yen strengthened as much as Y100.92 per dollar which is its strongest level this month.

Keep abreast of how currency movements will affect your global ETF portfolios by joining Chartwell ETF.

Trade Deficit Increase Hurts Dollar

By Carl Delfeld of the Chartwell ETF Advisor

The falling dollar has helped spur exports and the performance of some companies and exchange-traded funds. While this appears to have stabilized the persistent trade deficit, it is tough going because of structural problems

Today’s October trade deficit numbers are expected by Barchart to expand by $1.1 billion to -$57.4 bln from -$56.5 bln in September. The U.S. trade deficit in the past year has steadily improved due to strong U.S. exports tied to the weak dollar and strong overseas economic growth and demand. The U.S. trade deficit can continue to show some modest improvement since export demand should remain firm.

However, the U.S. trade deficit is likely to remain relatively wide over the foreseeable future due to intractable problems such as high oil import volumes and prices (which boost the dollar value of US oil imports), the poor U.S. savings rate which forces an influx of capital from overseas and the competitive trade advantages of nations such as China (weak currency, low labor costs). China’s trade surplus, a prime cause of excess liquidity in the economy, reached $26.3bn in November, only slightly lower than the record $27.1bn, according to figures released on Tuesday.

S&P projects that U.S. exports will increase just over 7% during 2007 and are likely to rise 9.5% in 2008 and 8.4% in 2009. The key to trade deficit coming down appreciably will be rise in Chinese currency and lower energy prices. Any of these happening will help value of U.S. dollar.

Learn more about ways to diversify your portfolio away from the U.S. dollar by joining the Chartwell Advisor.

Weak Dollar ETFs Gain Following

By Carl Delfeld of the Chartwell ETF Advisor

While the US greenback showed some strength last week, it ended on a sour note leading to more investors looking for exchange-traded funds that go up when the dollar goes down.

The dollar fell 0.2 per to $1.4870 against the euro, within a cent of the all-time low at $1.4966 it hit on Friday according to the WSJ. The dollar also fell 0.4 per cent to $2.0688 against the pound and 0.2 per cent to SFr1.1000 against the Swiss franc.

The dollar also fell sharply in Asian trade to a low of Y108.11 against the yen amid reports in the Japanese press that China would use its foreign exchange reserves to buy Japanese stocks through the China Investment Corporation, its sovereign wealth fund.

Investors have many ETF options to play the falling dollar. Rydex Investments offers CurrencyShares, an ETF grouping that tracks the price of 8 currencies. Each ETF buys foreign currency that is held in a bank in London and shares go up or down based on the foreign currency's value compared to the dollar. There is also the PowerShares DB G10 Currency Harvest (DBV) that tracks 10 currencies, going long on the top three currencies with the highest interest rates and going short on the "top" three currencies with the lowest interest rates. Crude but effective.

But watch out for the inevitable dollar rally. America's current account deficit has gone from 6.5% of GDP to 4.5% and our nation's trade deficit has also improved from 5% of GDP to 4% of GDP. If the Fed does not keep cutting interest rates, global markets may sit up and take notice.

Find out what ETFs you need to manage your currency exposure by joining the Chartwell ETF Advisor.

Carry Trade Aids Australia and Mexico ETFs

The carry trade whereby investors borrow in low interest rate currencies like the Japanese yen and invest in high yielding markets is helping some exchange-traded funds like Australia (EWA) and Mexico (EWW).

The New Zealand kiwi has also benefited from the carry trade but some think that it is peaking. In a Financial Times article, Adrian Schmidt, senior foreign exchange strategist at Royal Bank of Scotland, said investors should be selective as to which high-yielding currencies to buy.

According to Mr Schmidt, robust Australian capital spending figures could support the Australian currency, while the sharp decline in New Zealand business confidence figures should concern investors. High level of interest rates in New Zealand, combined with the high currency and the heavily indebted consumer sector meant the economy was living on borrowed time, as well as borrowed money, and the sharp drop in confidence looked like an early warning sign.

“The rally in the New Zealand looks like a selling opportunity,” said Mr Schmidt. “There looks to be better value in other high yielders, with the Mexican peso standing out.” The Norwegian krone was the other main mover on the currency markets, rising 0.4 per cent to NKr6.0420 against the dollar after robust economic data.

By Carl Delfeld of the Chartwell ETF Advisor

iShares gets into Currency ETF Game

The iShares family of exchange-traded funds announced that it will be introducing three new Exchange Traded Notes for the currency market. The trio are expected to begin trading on the New York Stock Exchange on or around May 9th. To date, Rydex is the family of ETFs most associated with foreign currency ETFs

The ETNs to be available later this week are the:

iPathSM JPY/USD Exchange Rate ETN (Ticker: JYN)
iPathSM GBP/USD Exchange Rate ETN (Ticker: GBB)
iPathSM EUR/USD Exchange Rate ETN (Ticker: ERO)

Exchange-traded notes or ETNs are similar to ETFs but are actually debt securities backed by Barclays Bank.
For term sheets on these upcoming ETFs, click here

By Carl Delfeld of the Chartwell ETF Advisor

CurrencyShares Euro Trust (FXE)

The euro is the currency of thirteen European Union countries, stretching from the Mediterranean to the Arctic Circle (namely Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia and Finland).
Euro banknotes and coins have been in circulation since 1 January 2002 and are now a part of daily life for 315 million Europeans living in the euro area.

(Click on image for larger view)

DE Smith of