THE high-profile battle between Washington and Beijing over China’s stubborn policy of pegging its currency to the US dollar has piqued retail traders’ interest in Asian currencies, and the Chinese yuan in particular. While investors have been able to trade currencies such as the yuan and the Indian rupee through offshore non-deliverable forward (NDF) contracts, this has typically been the preserve of professional investors. It has been nigh on impossible for an individual to take a punt on the value of the yuan in the currency markets due to restrictions and capital controls.
However, four new products from ETF Securities, which are scheduled to be listed on the London Stock Exchange next week, will enable sophisticated retail or even institutional investors to go either long or short the Chinese yuan and the Indian rupee against the US dollar. These ETCs will have a total expense ratio (TER) of 0.59 per cent and will be rolled out to other European stock exchanges in the coming months.
These emerging market exchange-traded currencies (ETCs) are the latest addition to ETF Securities’ exchange-traded currency platform, which was launched in November 2009. Chief operating officer of ETF Securities Nik Bienkowski says that they were created in response to strong client demand.
Due to the inaccessibility of the currency markets in China and India, the ETCs are based on Morgan Stanley’s MSFX Indices, which are designed to be a tradable benchmark for foreign exchange rate performance of the relevant currency pairs.
Each index has a long and a short version and will replicate the return of a constant position in the relevant NDF, which is rebalanced quarterly. The non-deliverable forward markets – and therefore the MSFX Indices and the exchange-traded currencies – reflect investors’ expectations of movements in the currency. Therefore, if you expect that Beijing will start to revalue the yuan this year – analysts still expect a gradual shift in its currency policy to occur some time this quarter ahead of the US mid-term elections.
Standard Chartered analysts note the strong positive correlation between the dollar-rupee and dollar-yuan 12-month non-deliverable forwards. Therefore, any appreciation in the yuan also ought to bode well for the Indian rupee and the analysts maintain their core overweight position on the currency. The rupee has recently lost ground against the US dollar as a result of deteriorating global risk appetite, but Standard Chartered says that these spikes should be temporary and pave the way for a more consolidated move lower in dollar-Indian rupee.
While these are currently the only emerging market exchange-traded currencies available, ETF Securities’ Bienkowski does not rule out further emerging market currency pairs being created in the future. He notes that Morgan Stanley has other FX indices available, including the Brazilian real, the Mexican peso, the South African rand and the Israeli shekel. “At the moment, we don’t have any specific listing dates. But if investors start asking for them, then we can bring them out within a matter of weeks if need be, or we may just choose to do it anyway,” he says.
But for now, investors should capitalise on exposure to the yuan and the rupee, two currencies which should continue to hit the headlines over the coming months and years.