With speculation rampant that the Federal Reserve may ease or
halt its bond-buying activities known as quantitative easing, the
U.S. dollar gotten a lift in the past two trading sessions.
Actually, the U.S. Dollar Index (DXY) is riding a multi-week
winning streak and the PowerShares DB US Dollar Index Bullish
), the DXY tracking ETF, has been a solid performer this
Those factors do not obfuscate the fact that the Fed's
money-printing efforts have heaped more pressure on the
greenback, which was already weakening long before Chairman Ben
Bernanke iniated quantitative easing.
Still, the U.S. dollar is considered one of the world's
reserve currencies and that is even with the loss of the AAA
credit rating. The other four reserve currencies are the euro,
British pound, Japanese yen and Swiss franc.
The International Monetary Fund is expected to add the
Australian dollar to the group of reserve currencies in the
coming months, a perhaps superficial honor, but one that does
reaffirm the notion that the Aussie is one of the world's
"While this doesn't necessarily create a catalyst for
investment, it does validate the perceived strength and stability
of Australia's currency and financial system by global decision
makers," said WisdomTree Portfolio Manager Rick Harper in a
research note. "Indeed, the term 'reserve currency' stems from
these government holdings (such as bonds) being held as reserves
at central banks around the world. Taking the interpretation a
step further, in the eyes of these government officials, the
Australian dollar could increasingly be viewed as a long-term
store of value."
Aside from a currency ETF, investors can tap the Aussie
dollar's strength and the country's AAA credit rating, something
only Switzerland has of the current reserve currency nations,
with the WisdomTree Australia & New Zealand Debt Fund (NYSE:
The $71.2 million ETF invests in Australian and New Zealand
sovereign debt with a bias toward the former, which accounts for
just over 74 percent of the fund's total weight. That means AUNZ
offers investors some degree of safety without the outright
sacrifice of yield found with U.S. Treasuries.
For example, the iShares Barclays TIPS Bond Fund (NYSE:
) has a
30-day SEC yield of negative 3.8 percent
. AUNZ's 30-day SEC yield is 2.89 percent.
Harper notes the Australian dollar's potential move to reserve
currency status could see investors increase their allocations to
"We believe that increased tracking of the Australian dollar
as a reserve currency could pave the way for an increasing
allocation in investor portfolios,"
Harper said in the note
. "For 2013, we believe that many of the compelling reasons
investors and sovereign wealth funds bought Australian debt in
2012 could continue to provide opportunities in the first half of
While it should be noted the Reserve Bank of Australia has
slashed the country's overnight cash rate by 175 basis points to
three percent since late 2011, RBA has not engaged in Federal
Reserve or Bank of Japan-style monetary easing. Nor has the
Reserve Bank of New Zealand.
In the case of RBNZ, only recently has the central bank
shown signs of intervening in the forex
to weaken the kiwi.
Not surprisingly, the Australian and New Zealand dollars have
been the best-performing developed market currencies against the
greenback since late 2008. While there have been plenty of calls
that both the Aussie and kiwi are overvalued relative to the
greenback, some market participants see further upside.
Earlier this week, Kerry Series, founder and chief investment
officer at Eight Investment Partners, told CNBC the Aussie could
up to $1.20-$1.30 against its U.S. rival
. In the CNBC interview, Series cited the Aussie's correlation to
Asian equities and noted that those stocks "are undervalued by at
least 20 percent."
That type of appreciation would benefit AUNZ, though the ETF
could also get some help from New Zealand as well. While RBNZ may
intervene in the forex market, currency interventions rarely have
the desire impact. Additionally, an interest rate increase in New
Zealand is seen as more probable than a cut over the next
More importantly, RBNZ Governor Graeme Wheeler
has ruled out money printing or quantitative
Those factors bode well for AUNZ, which features an expense
ratio of 0.45 percent and an average duration of four years.
For more on foreign currencies and
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Gain access to more investing ideas, tools & education.
Get Started on Marketfy, the first ever curated
& verified Marketplace for everything trading.