Record dollar bullishness bodes well for dollar cash and currency ETFs

Mar 19th, 2013 | By | Category: Alternatives / Multi-Asset

Professional fund managers are increasingly confident in the outlook for the US dollar, according to the latest BofA Merrill Lynch Fund Manager Survey. This month registered the highest level of dollar bullishness in the survey’s history with a net 72% of respondents expecting the US currency to appreciate over the next year.

Record dollar bullishness bodes well for dollar cash and currency ETFs

The latest BofA Merrill Lynch Fund Manager Survey registered the highest level of dollar bullishness in the survey’s history.

The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. A total of 254 managers, managing $691 billion, participated in the survey.

The survey findings resonate with Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, who reckons that: “Relative US economic outperformance on the back of the housing market’s ongoing improvement and the energy independence story will lead a secular uptrend in the dollar.”

Kathleen Brooks, research director at Gain Capital, predicts that the dollar could be the star of the foreign exchange world this quarter as strengthening US economic data helps the currency to become the growth currency of choice.

Brooks says: “We are most excited about a potential shift in the dollar, from being a safe haven to a growth currency. We expect the USD/JPY uptrend to continue, although this quarter the dominating factor is expected to be developments in the US and at the Fed, rather than at the Bank of Japan. We think USD/JPY could get to 100.”

This stance is echoed by analysts as Standish Mellon Asset Management, a Boston-based investment manager with a strong pedigree in currencies. Thomas Higgins, Standish Mellon’s global macro strategist, and Federico Garcia Zamora, the firm’s director of currency strategies, note: “At present, the Bank of Japan’s shift toward a more aggressive easing stance coupled with the Swiss National Bank’s ceiling in the value of the Swiss franc has increased the relative attractiveness of the US dollar as a safe-haven currency…In general, within the major currencies we prefer to be long US dollar and euro and short Japanese yen and Swiss franc.”

The overwhelming bullishness for the dollar bodes well for exchange-traded funds that offer long exposure to the currency. UK and European-listed examples include cash funds such as the Pimco US Dollar Short Maturity Source ETF (MINT) and db X-trackers US Dollar Cash UCITS ETF (XUSD) and currency pair ETCs such as the ETFS Short GBP Long USD (SGBP) and ETFS Short AUD Long USD (SAD), among others.

Of these, by far the largest is the actively managed Pimco US Dollar Short Maturity Source ETF, listed on the London Stock Exchange. This fund, which is based in dollars, aims to generate the maximum income consistent with capital preservation and daily liquidity by investing primarily in a diversified portfolio of USD-denominated short-maturity fixed income instruments. The fund is typically used as a dollar cash alternative, but can be used by investors who wish to speculate on the appreciation of the dollar.

Given the consensus opinion is positive dollar versus Japanese yen, investors may wish to express a more bullish view by considering the ETFS 3x Short JPY Long USD (SJP3). This London Stock Exchange-listed product provides triple-leveraged inverse exposure to the JPY/USD exchange rate, thereby benefiting from dollar appreciation against yen. The product has gained 28.87% already this year and is up 7.96% month to date, but, if the overwhelming majority of fund managers are correct, it looks well poised to continue to perform strongly.


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