One certainty from the world of foreign currency this year is that the U.S. dollar is an epic dud. The PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP), the tracking exchange-traded fund for the U.S. Dollar Index, is down slightly more than 10 percent year to date.
While the dollar has been flailing, even against the backdrop of two interest rate hikes by the Federal Reserve, other currencies are soaring and that includes emerging markets fare. The WisdomTree Emerging Currency Strategy Fund (NYSE: CEW), which tracks a basket of developing world currencies, is higher by 10.6 percent year to date.
CEW “seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar,” according to WisdomTree.
Value In Emerging Markets Currencies
While emerging markets equities and currencies are soaring this year, prompting some investors to wonder if they have missed the rally, data suggest there is plenty of upside potential left in these previously lethargic asset classes.
“Over the last several years, we’ve spent a tremendous amount of time speaking about currency risk and analyzing trends in currency markets,” said WisdomTree in a recent note. “We have provided dedicated exposure to EM FX through the WisdomTree Emerging Markets Currency Strategy Fund (CEW) since 2009. In our view, the most significant (and intuitive) driver of EM FX is global demand. When businesses or investors seek to buy an asset or engage in trade in an emerging market, often they convert hard currency into local. If demand for a currency outstrips supply, a currency will tend to appreciate.”
Strong emerging currencies can weigh on exporters, but are advantageous for commodities producers, of which there are plenty in the emerging world. Additionally, the weaker dollar helps ease the burden of external financing on dollar-denominated emerging debt.
A Diverse Lineup
CEW features exposure to 16 emerging markets with weights ranging from 6 percent to 6.5 percent. Countries represented in the ETF include Russia, Turkey, Chile, China, Poland, Brazil and India, among others.
“Since 2016, commodity prices have rebounded while volatility in most global markets has declined,” said WisdomTree. “Over this period, countries that experienced the most significant devaluation have seen their currencies rebound sharply. On average, EM FX has appreciated by over 5% against the U.S. dollar during this period. In our view, bifurcating these two periods can be instructive on two fronts. First, it provides investors with an idea of the pain that EM FX can provide during a weak EM FX, strong U.S. dollar market. But secondarily, it also shows that there can be fairly dramatic deviations across a group of economies that are anything but homogenous.”
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