Zacks Investment Research | Nov 22, 2016 01:26AM ET
The U.S. dollar is on a tear following Trump’s victory in the presidential election. The currency has been downbeat for the most part of this year thanks to not-so-robust U.S. economic growth and low interest rates prevailing in the country (read: Currency ETF Winners & Losers Post Trump Win ).
Can the Rally Last?
The U.S. dollar reached an all-time high of 101.28 at the time of writing) is still trading at a 38.5% discount to the all-time high.
On November 13, Deutsche Bank (DE:DBKGn) predicated 5% more gains in the dollar through 2017. The bank believes that a strong U.S. dollar will leave a disinflationary impact to negate a possible reflationary fiscal policy “when the economy is already at full employment."
Citigroup (NYSE:C) is also of the same opinion. Note that, Follow Goldman's Call on Dollar with These ETFs ).
The most expected beneficiaries are the funds following the U.S. dollar. WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU and PowerShares DB US Dollar Index Bullish Fund (UUP) added about 4.8% and 4.5% in the last 10 days (as of November 18, 2016), respectively.
Supportive Technical Trend
Investors should also note that relative strength index of UUP was 47.37 on November 18, 2016, meaning that the fund is yet to reach the overbought territory. The fund also has a positive weighted alpha of 4.10 . A positive weighted alpha hints at more gains.
In such a backdrop, let’s take a look at the ETF investing areas that will benefit and lose in a rising dollar environment.
Winners
U.S. Small-Cap Equities
As small-cap stocks are less exposed to foreign markets, these are less scathed by a stronger greenback. Plus, Trump’s keen focus on revamping America, especially infrastructure-wise and loose fiscal policies should set the stage for small-cap U.S. stocks. iShares Russell 2000 ETF Confident About Trump Rally? Play These Small-Cap Blend ETFs ).
Play Japanese Equity or Short Yen
The policies of Japan and the U.S. dollar are now going in opposite directions with the bank of Japan offering to purchase unlimited bonds for the first time under a refurbished policy agenda. On the other hand, the U.S. central bank is mulling over policy tightening. As a result, the U.S. dollar logged “its biggest two-week rally against the yen since 1988.”
CurrencyShares Japanese Yen Trust YCS to reap profits.
Bet on Europe Equites or Short Euro
Investors can also play the expected dollar surge by investing in Short Euro ETF longest winning streak against the euro since the European currency’s inception in 1999.”
Investors should note that now U.S. consumers would find foreign goods and travel inexpensive. So, buying Japanese and European goods and services by U.S. consumers should get a boost. This economic trend can be tapped by investing in iShares Currency Hedged MSCI Eurozone ETF (HEZU).
Losers
Emerging Markets’ Currency in Trouble
Most emerging markets fell prey to greenback’s gains. Rising bond yields at home must have curbed demand for relatively high-yielding emerging market securities. As per the source , emerging-market stocks and bonds have seen about $11 billion in foreign investments gushing out since election.
Be it Mexico, Brazil, Indonesia or Malaysia – most haven seen their currency weakening. To restore the slide, Mexico soon hiked rates to over a EEM was down about 3.7% in the last 10 days (as of November 18, 2016).
Gold Losing Glitter
Normally commodity investing takes a hit on a rising greenback as these are priced in that currency. Among these, safe haven and non-yielding asset gold was hit hard on renewed interests in risk-on investments. SPDR Gold Shares (NYSE:GLD) (V:GLD) was down over 7.4% in the last 10 days (as of November 18, 2016).
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