AdviserVoicecurrency Archives - AdviserVoice

Tapering: Where others see risk, William Blair sees opportunity

Wed, 26 Feb 2014 20:35:21 +0000

US tapering presents investment opportunities: William Blair

Fears of stability across the globe around tapering are creating significant investment opportunities in countries like India, Thailand, the Ukraine, Venezuela and Argentina, according to William Blair’s Head of Dynamic Allocation Strategies (DAS), Brian Singer.

On a visit to Australia to promote William Blair’s DAS to institutional investors last week, Mr Singer said geopolitical events do not tend to change the valuation of assets or the value of currencies. “Risks are definitely out there, but the developments are creating opportunities,” he said. “These events significantly motivate prices away from or towards fundamental value.”

Mr Singer said William Blair’s DAS team assesses each individual geopolitical situation, to decide whether the opportunity is adequately compensating for the risk that is introduced. “What we are doing is taking some of the risk away from just being exposed to the market and adding risk that is uncorrelated to the currency,” he said. “India became our largest position when Raghuram Rajan became the Governor of the Reserve Bank of India in August 2013.”

India is still the William Blair DAS team’s largest position due to a significant interest rate differential and because the currency is cheap relative to its fundamental value. “It looks to be a great opportunity going forward, and a great diversifier for portfolios.”

Mr Singer said the first port of call for the William Blair DAS team in deciding to invest in equity markets, bond markets and currencies all over the world, is to determine fundamental value. “We look for prices that revert back to fundamental value over time,” he said. “Within the current geopolitically unstable environment, there are a lot of strategic negotiations and it is important to understand those negotiations and the behaviours of the players as that pushes prices around.“

On currencies, Mr Singer’s said the William Blair DAS team estimates the value of the Australian dollar at about $0.65-$0.70 to the US dollar. “So it’s a long way away from fundamental value,” he said. “We are short and we are short most of the commodity currencies for a number of reasons. First of all because we believe commodity super-cycles have led investors to push prices up above fundamental values and secondly because we see the opportunity for those prices to revert back to fundamental value as commodity prices come down.”

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Dalton Nicol Reid Market Update

Sun, 23 Jun 2013 21:50:54 +0000

In a continuation of recent trends the US market was soft last week with all asset classes weak – gold, bonds, equities and the A$. The reason ironically is that the US has signalled that their economy is strong enough to start considering ending their quantitative easing which has supported their economy through the GFC period. The market is expecting that the level of monthly bond purchases by the Federal Reserve will reduce from US$80b a month to say $65b by the end of the year.

So why is this important and why is the market selling off?

Over the past few years Hedge Funds and others have been able to make certain investments on expectation that the trends will continue. That is that QE will keep bonds yields low and that this will mean other yield orientated investments will also be attractive. These investors are now starting to unravel some of their positions which are causing an adjustment for the markets.

Implications

The implications for our market are as follows:

It places downward pressure on our currency as A$ bonds and high yield stocks were one of those investments that have benefited from QE. In the short term as offshore investors sell out of the Australian positions it creates some negative volatility.
Ultimately a pullback in the currency has positive implications for profits of the Australian market and will improve the competitive position of many companies. We estimate that at a 90 cent A$ there is a 9% positive impact to profits.
From a valuation perspective the Australian market has pulled back 10% so when combined with the impact of a lower currency the Australian market is nearly 20% cheaper than it was two months ago.

In addition to the QE easing the Australian market is adjusting to life after the resource boom. Some of those sectors of the economy which have done well in the past few years are likely to struggle and the RBA will be looking for other segments such as housing and non-residential construction to breathe life into the economy. A lower currency and lower interest rates will help in this regard as will an election to remove current uncertainty.

From a positioning perspective we continue to like those companies exposed to offshore earnings such as Brambles, QBE and Ansell and those companies which can benefit as money flows out of bond markets (such as QBE and Macquarie Bank). We will also be looking at opportunities that emerge from the current volatility.

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Aussie, Aussie, Aussie

Mon, 28 May 2012 21:30:28 +0000

The Aussie dollar has fallen in response to a bout of new jitters about Europe and China. The weaker currency has a raft of implications for the Australian economy.

CommSec has analysed where the top 40 listed companies earn their money across the globe. Only 58 per cent of revenues from top 40 companies are generated solely from Australia. To read the full report, click here.

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BetaShares cautions investors on impact of currency on gold performance

Tue, 19 Jul 2011 22:14:23 +0000

The strong correlation between gold prices and the Australian dollar has impacted unhedged gold exposures which have consistently under-performed hedged gold exposures historically, analysis by BetaShares shows.

For example, while spot gold prices surged 74% in the period December 2008 through end May 2011, unhedged spot gold returned only 14%. This is because a rise in the value of the Australian dollar eliminated much of the benefit of the rising value of gold (which is priced in US dollars).

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said that while gold demand is currently at unprecedented levels, many investors do not realise that a historical relationship exists between the price of gold bullion and the Australian dollar.

“By analysing the movements in the gold spot price and the AUD/USD exchange rate we have found that, generally speaking, over the last 3 decades, when the price of gold bullion has risen so too has the Australian dollar relative to the US dollar,” he said.

“Gold is widely regarded as a currency in its own right and thus, during times of US dollar weakness, gold often increases in value as many investors choose to own gold rather than US dollars. Similarly, the Australian dollar is also likely to strengthen during times of US dollar weakness. In addition, Australia’s role as a major producer of gold and other commodities means the Australian dollar is seen globally as a “commodity currency”. Accordingly, strengthening prices for commodities (including gold) have a tendency to push the local currency higher.”

“The tendency for gold and the Australian dollar to move together has negatively affected local investors with unhedged exposures to gold. At BetaShares, we recognised this relationship and listed the first currency hedged gold ETF on the market,” said Mr Corbett. “If the US spot price of gold rises 10%, investors in the BetaShares ETF can expect a 10% gain, too, before fees and expenses.”

“If an investor has a bullish view on gold, it is our view that investors should look for pure exposure to gold which necessarily involves hedging the currency” Mr Corbett concluded.

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Investor Signposts: Week Beginning May 29 2011.

Thu, 26 May 2011 03:09:44 +0000

Upcoming economic and financial market events

The big picture

Do you ever get that feeling of déjà vu? A year ago the world fretted about European debt, and more specifically,about Greece. Now investors are focussed on the same sort of issues, concerned that a sovereign country could default on its debt obligations.
A year ago we took the view that the issue would not become serious enough to derail the global expansion and we stick by that view. In its own right Greece is the 26th largest economy in the world and about a quarter the size of Australia. But as one analyst has observed in the US, Greece is around the size of the Dallas-Fort Worth area.
But of course the key concern is not about Greece per se, but about the risk of contagion. If Greece fails, that creates problems for the countries and banks that lent it money. And they may have to trim their exposures to other countries and banks. But a lot would still have to unravel for the global economy to be affected in a major way.
China will provide the biggest contribution to world economic growth this year, adding just over 0.8 percentage points to the expected 4.4 per cent growth rate. Then follows the US at 0.74pp, followed by India at 0.18pp and Japan at 0.10pp. You actually have to go a long way down the list to find European countries and the biggest countries – Germany and France – are by far the strongest and best able to absorb the shocks.
Australian banks also have very small exposures to the problem countries in Europe. As our banking analyst at CBA, Ben Zucker, has observed, total exposure of our major banks to the problem European countries is $17.6billion or 0.69 per cent of total assets.
And the biggest exposure by Australian banks is to one of the biggest countries – around $10 billion to Italy. Of that total, NAB has around $5.5 billion but its chief financial officer has stated publicly that Italy would need to fail for NAB’s holdings of short-term Italian government bonds to be affected.
In short, the world is worrying unduly about the European debt issue causing a new crisis for the global economy. And domestic and foreign investors are worrying unduly about the crisis affecting Australian banks in any material way. As always when these issues come along, more disciplined longer-term investors get presented with buying opportunities.

The week ahead

Each change in season is ushered in with a barrage of new economic data. So brace for the ‘winter whirlwind’ with no fewer than a dozen key indicators to be released in Australia over the next fortnight with a Reserve Bank Board meeting thrown in for good measure. In the US, the focus will be on Friday’s job figures.
In Australia, the week kicks off on Monday with the “Business Indicators” release from the Bureau of Statistics. This publication contains estimates on sales, profits, wages and inventories with all the indicators expected to be on the soft side. Not only did the floods affect results, but also the high Australian dollar and soggy consumer spending. Profits are tipped to fall 1.7 per cent with inventories down 0.2 per cent.
On Tuesday the Reserve Bank will release lending (private sector credit) figures while data on home prices will be issued by RP Data and Rismark. And the Bureau of Statistics issues data on building approvals, government spending and the balance of payments. Credit probably lifted 0.4 per cent while home prices were likely flat in April and dwelling approvals may have lifted 2 per cent with house sales recovering.
On Wednesday the economic growth figures for the March quarter are released. The Reserve Bank has already flagged that the economy likely contracted in the quarter with the Queensland floods and cyclone having a major impact. A fall of around 0.1 per cent is on the cards, but forecasts will be firmed up after data is released over Monday and Tuesday. The Reserve Bank said it would “look through” the impact of the floods, but the recent rash of weak economic readings has reduced the likelihood of a June rate hike.
On Thursday, international trade and retail spending figures for April are released while on Friday the latest data on tourism and migration flows are released. Retail trade fell by 0.5 per cent in March after a 0.8 per cent lift in February. But while a 0.6 per cent rebound in sales is possible in April, the point worth noting is that the timing of Easter holidays always poses problems for interpretation of the March and April data.
In the US, the first week of the month always sees the spotlight shine on the monthly job data (non-farm payrolls) and this month is no different. But as well as the employment figures, the ISM manufacturing and services gauges will be closely-watched, together with figures on home prices, consumer confidence and auto sales.
The week kicks off with a public holiday on Monday followed by the Case-Shiller home price series, consumer confidence data and regional manufacturing gauges on Tuesday. Home prices may have eased 0.1 per cent inMarch but the timelier consumer confidence reading for May is tipped to show an improvement.
On Wednesday the ISM manufacturing gauge is released alongside the ADP employment survey, Challenger job layoff series and data on auto (car and truck) sales. The ADP series is expected to show a 175,000 lift in jobs butthe ISM manufacturing gauge may have eased from 60.4 to around 59.0.
On Thursday, figures on factory orders and productivity are issued while the non-farm payrolls survey dominates Friday’s agenda alongside the ISM services gauge. Forecasters are tipping an increase in new jobs of around190,000. But with more looking for work, the jobless rate is expected to hold at 9 per cent. And the ISM service sindex is expected to have been little-changed in May, around a reading of 53.0. Any reading above 50 suggeststhat the services sector is growing.
Overall the impression is likely to be that the US economy remains on the recovery road, but it will take far stronger readings than the consensus forecasts to advance thinking about when the Federal Reserve will shift from easy monetary policy settings to a more neutral stance.

Sharemarket

We have been reluctant to trim our short-term forecasts for the sharemarket, but the Euro debt worries have lowered the bar. Overall, it appears more the case that investor jitters, rather than fundamentals, have shifted, but as was the case a year ago, we are awaiting concrete actions by European policymakers to restore stability. In addition, a combination of soft domestic consumer spending and a higher Australian dollar will prompt more earnings downgrades in the next few months. Clearly the economy is not performing as strongly as either the Reserve Bank or Federal Treasury had assumed. We now expect the All Ordinaries to be around 4,800 points at end June, rather than 4,950 (ASX 200 at 4,700). And by end year, the All Ords is expected to be around 5,000-5,100 (ASX 200 at 4,900-5,000).

Interest rates, currencies & commodities

Near-term expectations of interest rate hikes have clearly softened. A rate hike in June is seen as a 7 per cent chance by financial markets participants. In addition a rate hike by August is seen as only a 20 per cent chance and indeed a rate hike is not fully factored in over the next year. How quickly sentiment can swing.
Our commodity strategists are tipping prices to remain relatively firm in the short-term before easing over much of 2012. The CBA commodity price index is expected to end 2011 up by around 19 per cent before easing by around 7 per cent in 2012. At the end of 2011 the gold price is seen around US$1400 an ounce with oil near US$112 a barrel. And while gold and oil are both seen little changed over the course of 2012, this masks some significant shifts over the year. And bad news for cotton farmers, with prices tipped to ease from US154c per pound currently to US75c/lb by the end of 2012.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and anyopinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability orcompleteness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person forloss or damage arising from the use of this report.The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should,before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needsand, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary ofCommonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability.Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement orsummary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred toin this report.

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Strategy Monthly: Euro confusion

Fri, 06 May 2011 04:48:00 +0000

Equities appear to have recovered their poise after the four-week correction from mid February to the lows around the time of the terrible events in Japan mid March. Markets have taken the ECB raising interest rates in their stride, perhaps because expectations for rate hikes in the UK and US have been pushed further out into the future. One consequence of those moves has been to make the euro a strong currency in recent weeks.

First-quarter earnings have given more evidence of the rude health of corporations around the world ― profit margins are high, reported earnings are high and balance sheets strong.

Equities and credit remain attractive against government bonds and cash. Gold remains more attractive against cash than at any time in its history. Gold costs money to store and secure but cash basically yields zero (3-month US Treasury bills yield 0.025% to be precise). We have never had interest rates this low (data goes back to 1694 in the UK) so gold is as attractive as it has ever been on a relative basis.

Given this backdrop, it is justifiable for ‘risk assets’ to have performed reasonably well. That suits our core positioning. However, we remain concerned that there are too many structural hangovers from the Great Recession to make unalloyed bullishness the appropriate strategy.

One of those hangovers is the unresolved matter of dealing with the debt of Greece, Portugal, Ireland and potentially others in the eurozone periphery. Portugal has now agreed a €78bn three-year financial bailout involving the EU and the IMF.

Currency traders are looking through these issues and declaring that the ECB moving its refinancing rate to 1.25% is enough to make the euro the ‘bees-knees’ when it comes to global currencies.

In the short-term, we have some sympathy with the notion of looking through the periphery problems. That is exactly what policymakers in Europe want. We need to remind ourselves that there is a plan for dealing with the situation. That plan is simple.

The EU is trying to buy time to allow its banks to be in healthier shape before asking them to deal with the implications of a debt restructuring in Greece or any other periphery country. Hence, the ECB feels it can raise interest rates because it can focus on its inflation mandate and let the politicians deal with the periphery.

The context for that view is completely consistent with the longer-term thematic backdrop that must always be borne in mind when thinking about the EU and the single-currency. That is, to paraphrase Dr Friedman, the euro is always and everywhere a political phenomenon.

On the face of it, therefore, the threat to the euro comes if there is a loss of political will to support it. There is no indication that the ruling class has lost that commitment. Indeed, the setting up of the EFSF and ultimately the ESM are indications that the commitment remains wide and deep.

However, there is a lot of concern that the electorate in northern Europe in particular will do a Roberto Duran and declare “no mas”.

We completely agree that a political backlash in northern Europe is a critical risk for the euro. Political instability would undermine the single currency and, rather annoyingly for those ruling classes, the electorate get to vote now and again.

The Finnish election on April 17 was one such annoyance. It was an unusual Finnish election because it made the front pages of newspapers across the world. The rise of the populist True Finns party (which opposes EU bailouts) to a third place finish, stoked concerns that the northern European populace are indeed now revolting against the bailouts of the south.

The leader of the True Finns put it rather more colourfully: “The Finnish cow should be milked in Finland and the milk shouldn’t be sent abroad in charity.” Timo Soini deserves to be recognised for his wisdom.

However, in the remainder of 2011 there are few opportunities for European electorates to voice their concerns. There is a Portuguese election in June but nothing significant in northern Europe. We take the growing populist opposition to the bailouts in the euro area very seriously. However we suspect that its impact in 2011 will be limited.

But surely Greece has to restructure its debts given its 2-year government bond trades at a yield of 23%? At some point yes, and there are risks in the next month or so that events will push the story back onto the front page. On May 15, the Greek government presents its budget. In June, the IMF will report on the progress Greece has made since the original bailout.

We suspect there are three possibilities for ultimately resolving the problem. We see the probabilities of each to be rather different today than they may be in two or three years time.

More assistance from the EU/IMF to avoid any restructuring. This is the most likely outcome in the near-term. There is no indication that the French or German ruling political class have any interest in jeopardising the euro project by forcing any debt restructuring on a member state until the broader financial sector, including French and German banks, are in better shape to deal with it. Probability of happening this year: 60%. Probability of still being a tenable policy in 2013: 5%.
Debt maturity is extended but no haircuts on principal. By not haircutting, financial institutions do not have to recognise any capital losses on their Greek debt. The question is whether this can be done without the market immediately thinking that it is just a stepping-stone to option three below. Probability of happening this year: 30%. Probability of being a tenable policy in 2013: 15%.
Debt restructuring with haircuts for creditors. It would most likely be a soft version, along the lines of the Brady bonds issued in the 1980s to end the Latin American debt crisis. They involve some recognition of losses but give creditors a higher-grade bond to hold in place of the restructured original debt. This will likely be done on a voluntary basis by EU financial institutions. Probability of happening 10% this year; 80% by the end of 2013.

The critical thing to think about though is that the endgame for Greece will likely be some form of debt restructuring. It will involve losses for a lot of financial institutions in Europe. When this happens, it will almost certainly lead to renewed fears of contagion to the other ‘PIIGS” too. It is only a matter of time before this dominates the front pages again. Whether the euro will be quite such a strong currency when it is happening remains to be seen. But one suspects not. Has selling the euro become a plausible hedge against a core pro-risk portfolio?

Our asset allocation is overweight equities and fixed income; underweight property and cash.

This communication is directed only at investment professionals, and should not be distributed to, or relied upon by private investors. This document is not intended for retail distribution. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority. The information in this report is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments may fall as well as rise and is not guaranteed.

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BetaShares U.S. Dollar ETF quadruples in size in a month

Tue, 29 Mar 2011 01:08:57 +0000

BetaShares U.S Dollar ETF (ASX Code: USD) AUM reaches $50 million

USD consistently ranking as one of top three most actively traded ETFs

BetaShares passes $120 million in AUM three months after initial product launch

BetaShares Capital Limited (BetaShares) has announced that its US dollar exchange traded fund (ASX Code: USD) has quadrupled in size in the last month reaching $50 million in assets under management. The strong demand for this product has also resulted in BetaShares reaching another milestone, surpassing $120 million in AUM in just three months post the launch of its initial products.

Listed on 1 February 2011, BetaShares U.S. Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the demand for the U.S. Dollar ETF has exceeded expectations and has consistently ranked as one of the top three most traded ETFs on the Australian Securities Exchange.

“We’re continuing to see strong demand from investors looking to back their view on the US$, particularly in light of the historically high levels of the A$ versus the US$ at present” he said.

Stephen Jani, Head of FX Sales at JP Morgan Chase Bank, said investor motives vary: “There are several reasons why investors want exposure to the US$ including participating in a potential US economic recovery, hedging future cross border business obligations and diversifying portfolio exposure. Whatever the reason, investor demand for the US$ is strong as evidenced by the success of the BetaShares product and growth in funds under management,” Mr Jani said.

The strong flows in the U.S Dollar ETF have also resulted in BetaShares reaching over $120 million in AUM since listing its initial products in December 2010.

“BetaShares was set up to address product gaps in the Australian ETF market and based on the strong demand of our ETFs to date, we believe we’re well on the way to achieving that goal,” Mr Corbett said.

“When you look around at ETF markets globally, there is always a strong local player tailoring solutions for the local investor. Reaching this milestone confirms BetaShares as that local provider and we look forward to innovating and delivering further ETF options for Australian investors,” he concluded.

Further information can be found at www.betashares.com.au and the ASX website.

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BetaShares US Dollar ETF debuts as top 10 most traded ETF on ASX

Sun, 20 Feb 2011 23:45:37 +0000

AUM more than doubled in second week of trading
Median trade was A$15,000, indicating pent up demand from retail investors for access to U.S dollar exposure in a simple, transparent and low cost way
Strong interest from small businesses looking to use the ETF to hedge upcoming U.S. dollar purchases

BetaShares Capital Limited (BetaShares) today announced its newly listed US dollar exchange traded fund (ASX: USD) was one of the top 10 most traded ETFs on the Australian Securities Exchange in its first two weeks of trading with assets under management doubling in the second week of trading.

Listed on 1 February 2011, BetaShares US Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the average trade size of $15,000 indicates strong retail appetite for foreign exchange investment opportunities that were previously unavailable to them.

“Exorbitant fees and poor exchange rates in foreign currency bank accounts mean retail investors have been effectively shut out of the foreign exchange markets up until now. Heavy trading by retail investors in the USD ETF suggests a high level of pent up demand for cost effective and simple foreign exchange investment opportunities,” Mr Corbett said.

“In addition, we are finding that there are a significant number of investors who are investing in this product as a simple way to get exposure to the potential recovery of the U.S. economy”, he continued.

The launch of the USD ETF comes at a time of historic strength for the Aussie dollar, which is currently trading at about 40% above its long run average value. The ETF enables investors to capitalise on any potential weakening in the A$ relative to the US$. For example, if the US$ appreciates 10% against the A$ (i.e. if the A$ falls in value), the price of the ETF should go up 10% too.

This exposure comes at a fraction of the cost of current mechanisms available to most investors. Investing A$10,000 in a US dollar bank account can cost an individual up to $700 over a six month period due to fees, costs and poor exchange rates. The superior rates provided by BetaShares mean the same investment in its ETF would cost around A$70.

BetaShares has also reported strong interest from small to medium business owners which have large US dollar capital expenditures planned in the future and are looking to hedge against a fall in the Australian dollar.

The US Dollar ETF is the third ETF listed by BetaShares after the Resources Sector ETF (ASX: QRE) and Financial Sector ETF (ASX: QFN) listed on the ASX in mid December. The product launch is further evidence of BetaShares’ commitment to provide Australian investors with ETFs tailored to the Australian market.

Further information can be found at www.betashares.com.au and www.asx.com.au.

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Investor Signposts: Week Beginning February 13 2011

Thu, 10 Feb 2011 01:26:10 +0000

The big picture

The big issue across the globe at present is inflation. At the start of the year sharply rising food prices prompted riots in Algeria, with dissatisfaction quickly spreading to Tunisia and Egypt. The unrest in Egypt also served to unsettle other regimes across the Middle East as evidenced in anti-government riots in Jordan, culminating in the dismissal of the government.
And it’s not just food prices that have been soaring, textile prices have risen sharply over the past five months with cotton doubling in price to record highs and wool hitting the highest levels in 23 years.
While some may blame speculators for the higher prices, for most markets it is simply the result of supply and demand. Emerging economies have grown strongly, prompting higher demand for food, clothing and other staples. But supply has been struggling to keep up – a function of weather, a delay in response to the surprising strength in demand and industrialisations in many countries that has led to a reduction of agricultural land.
Of course in some respects, higher prices for agricultural commodities is positive for emerging and developing nations, reliant on commodities for income. But while producers gain, poorer workers, especially in manufacturing and tertiary sectors, are faced with higher living costs. Thus the rising levels of unrest across the developing world as people complain that governments are failing to look after their interests.
Many advanced nations must wonder what all the fuss is about. In the US, the headline rate of inflation stands at 1.5 per cent while the core rate (excludes food and energy) is just 0.8 per cent. In Australia, recent figures showed underlying inflation at decade lows in the December quarter while the measure of retail prices actually fell by 0.1 per cent.
But as economies in the US and Europe continue to recover, fuelled by arguably the most stimulatory monetary policies on record, inflation will become a more pressing concern. Certainly longer-dated US treasury bond yields have risen sharply with 10-year yields up 32 basis points in just the past eight days, hitting a 10-month high of 3.76 per cent on February 8. And over the past four months, US 10-year yields have risen by 133 basis points, out-pacing a 75 basis point lift in equivalent Australian bonds.
China has lifted interest rates for the third time since October last year to head off inflationary pressures and we can expect a progression of other central banks to tighten policy over coming months.

The week ahead

Lending figures dominate the domestic economic calendar over the coming week while in the US there is a solid array of top-shelf economic indicators due for release.
On Monday, figures are expected to show another solid lift in housing lending with borrowers locking in commitments made before the November rate hike. Overall we expect that the value of loans lifted by 3 per cent in December after a 2.9 per cent increase in November. But the real test will come when potential borrowers decide to actually take up the commitments made by lenders.
On Tuesday, data on lending commitments is made, covering personal, lease and commercial categories as well as the housing figures revealed a day earlier. On the same day the Reserve Bank will release minutes of its February 1 Board meeting while ABARES will release its latest Crop Report.
On Wednesday, the January new car sales figures will be recast by the Bureau of Statistics. Industry data has already been released showing sales of 73,584 vehicles, down 1.7 per cent over the year. CommSec expects the seasonally adjusted estimates provided by of ABS to show a fall of around 2 per cent for the January month.
On Thursday, detailed monthly employment statistics are released together with January imports data. And on the same day Assistant Governor Philip Lowe presents views on the economy when he fronts an Economics and Political Overview conference conducted by business group, CEDA.
Overseas, the week starts with key economic data from China. On Monday, trade data is released while on Tuesday the customary barrage of inflation, production, consumer spending and investment figures are released. The old adage used to be that if the US sneezed, the world caught cold. Now it is more accurate to say if China sneezes the world would catch a cold and Australia would get pneumonia.
In the US, a bevy of market-moving statistics will be released over the week. On Tuesday, retail sales data is issued together with capital flows, business inventories, trade prices and the Empire state index. Economists expect another solid 0.6 per cent lift in retail sales in January after a similar strong gain in December.
On Wednesday, industrial production figures are issued alongside housing starts and producer prices. The Federal Reserve also releases minutes of the January 26 meeting on the same day. Production is tipped to rise 0.5 per cent with housing starts up 2 per cent to 540,000 and core producer prices (excludes food and energy) up 0.2 per cent.
On Thursday, consumer prices, the leading index and Philadelphia Fed index are released. Core consumer prices are tipped to edge just 0.1 per cent higher.

Sharemarket

The Australian profit-reporting season continues in the coming week. And if the past week has been anything to go by, expect companies to be generally sombre on the outlook, especially for consumer-focussed businesses.
Amongst those to report on Monday include Bendigo Bank and Leighton Holdings. On Tuesday Brambles, Foster’s, Primary Healthcare, MAp group, Commonwealth Property and CFS Retail are scheduled to release earnings. A rash of companies will report on Wednesday including BHP Billiton, CSL, SEEK, The Reject Shop, SMS Management and Dominos Pizza. It’s another big day for earnings reports on Thursday with Coca Cola Amatil, ConnectEast, Prime Media, Qantas, Santos, Westfield and Wesfarmers scheduled to report. And on Friday Automotive Holdings, Billabong, Fortescue, James Hardie, Duet and Consolidated Media are amongst those to report.

Interest rates, currencies & commodities

Little to report in currency land with major currencies largely trending sideways against the greenback over the past week. What is remarkable is the relative absence of volatility – a trend in evidence across all financial markets. The Aussie dollar is seemingly comfortable near parity against the greenback, holding between US98.5 and 102.0 cents over 2011.
Bond yields have lifted sharply over the past week as investors have become more confident about the US economic recovery, and similarly more worried about a lift in inflationary pressures. Australian 10-year bond yields have lifted to 10-month highs of 5.75 per cent with 3-year yields up to 5.30 per cent. Interestingly, short-term rates have been largely stable with 90-day bill yields holding near 4.90 per cent.
In contrast to the inflationary fears, commodity prices have actually retreated over the past week, dragged down by lower energy prices. The CRB futures commodities index hit 28-month highs of 342.17 on February 1 but has since eased by around 1.0 per cent.
But while overall prices have eased, a key area of strength on commodity markets has been fibres. Cotton prices have lifted to record highs with prices doubling in just under five months. Also doing well is wool with the eastern market indicator soaring to 23-year highs. Demand from Europe has strengthened, Chinese demand has remained firm but supply hasn’t kept pace. In fact wool prices have lifted 45 per cent in US dollar terms in just over four months.

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BetaShares launches Australia’s first currency ETF

Tue, 01 Feb 2011 00:44:35 +0000

BetaShares U.S. Dollar ETF
ASX code: USD

ETF tracks performance of US$ relative to the A$
Simple structure opens up foreign exchange markets to retail investors at wholesale rates
For the first time, investors are able to trade currency on the ASX like any share

BetaShares Capital Limited (BetaShares) today listed Australia’s first currency ETF on the Australian Securities Exchange (ASX).

Trading under the ASX Code ‘USD’, BetaShares U.S. Dollar ETF tracks the performance of the U.S. dollar (US$) relative to the Australian dollar (A$).

The new ETF employs a simple, transparent and highly cost-effective structure, with the assets of the fund consisting of US dollars held in a bank account with JP Morgan Chase Bank.

The launch comes at a time of historic strength for the A$, which is currently trading at about 40% above its long run average value, and the ETF should appeal to investors looking for a simple way to capitalise on any potential weakening in the A$ relative to the US. For example, if the US$ goes up 10% against the A$ (i.e., if the A$ falls in value by 10%), the price of the ETF should go up 10% too.

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares, pointed out the tremendous cost effectiveness of the product relative to opening a US dollar bank account in Australia. An individual seeking to invest A$10,000 in a US dollar bank account with one of the major Australian banks can pay up to $700 over a 6 month period due to fees, costs and poor exchange rates. By contrast, that same investment in the BetaShares U.S. Dollar ETF would cost around A$70. The cost savings primarily derive from the foreign currency rates that BetaShares is able to access – rates that were previously the domain of large wholesale investors only.

“Current FX investment options – whether FX trading platforms, CFDs or foreign currency bank accounts – can be complicated, expensive or potentially risky. Simply put, until now, there was no way for retail investors to get exposure the US dollar in a cost effective and simple manner,” Mr Corbett said.

The currency market is the largest and most liquid financial market in the world with turnover in excess of US$3 trillion per day. The new BetaShares ETF provides investors with the ability to access this market simply, via the ASX, allowing them to execute a broad range of investment strategies.

“Complexity and cost has always been a barrier to currency exposure for retail investors. BetaShares U.S. Dollar ETF allows investors to take long or short term views on the US currency, diversify portfolios or hedge against currency risk. Investing is a simple as buying any share on the ASX.”

“For some investors, the BetaShares U.S. Dollar ETF also has potential tax advantages. For example, for those investors that hold their investments on capital account, any gains made using the ETF may be treated as capital gains, rather than income, which means investors may be able to benefit from capital gains discount should they qualify under the ATO regulations,” continued Mr Corbett.

The U.S. Dollar ETF is the third ETF listed by BetaShares after the Resources Sector ETF (ASX: QRE) and Financial Sector ETF (ASX: QFN) listed on the ASX in mid December. The product launch is further evidence of BetaShares’ commitment to provide Australian investors with ETFs tailored to the Australian market.

Stephen Jani, Head of FX Sales at JP Morgan Chase Bank said: “We are excited to work with BetaShares in delivering a product which expands the investment suite for Australians. The ability to trade currency on the ASX will be of significant interest to anyone seeking exposure to the US dollar such as investors and small businesses.”

This ETF is an example of BetaShares’ ability to respond to market demand and quickly deliver solutions for the local investor,” Mr Corbett concluded.

Further information can be found at www.betashares.com.au and www.asx.com.au.

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