“Always keep an eye on where the money is going,” says John Authers in the FT. The CFA Institute’s annual conference is attended by investors whose decisions drive the market. And they’re now betting on emerging currencies rising. Emerging markets are grappling with inflation. So they are likely to allow their currencies, which they have traditionally kept weak in order to stimulate export growth, to rise. That should temper inflation through lower import prices.
There are other, longer-term reasons to expect Asian currencies in particular to appreciate (other emerging market currencies are not manipulated to the same degree so they look less undervalued long-term). One is that a higher exchange rate goes hand in hand with mounting productivity and economic growth. And as Asian countries’ reliance on exports declines, there is less reason to keep currencies weak.
There have already been signs of gradual movement towards freely floating currencies. Singapore’s trading band, for instance, has been progressively shifted upwards as a means of controllinginflation. The trend is set to continue, with Morgan Stanley expecting the Singapore dollar to gain another 8% by December 2011.
However, betting on Asian currencies isn’t particularly easy. For a short-term punt, spread-betting is the best option. Opening a bank deposit account, either with a UK bank or in Asia, is possible for a few popular currencies such as the Singapore dollar. Another play on the latter is the Deutsche Bank Singapore Money Market ETF, listed in Singapore (KJ6). But its current tax status here means that returns will be taxed as income rather than capital gains.
To bet on a broad basket of currencies, consider the Aberdeen Global Asian Local Currency Short Duration Bond Fund (00 352 46 401 0820), says MoneyWeek Asia’s Cris Heaton. There is a bit of interest rate risk here, but the yield is much higher than on money market funds; the current yield to maturity is 3.2%. The minimum investment is $1,500 or the sterling equivalent (currently £925). The sterling-denominated version of this fund is only available as an accumulation fund.