Tuesday, March 9, 2010

Currencies: The Canadian Dollar Could Well Will Be The Next Star; ETFs To Use

The Australian dollar has risen significantly since that country's central bank started raising interest rates in 2009. Please see the FXA ETF chart, which tracks the Aussie dollar:

However, the next star could well be the Canadian dollar. The cycle could well be repeated now with the Canadian dollar as the Bank of Canada is set to raise rates in the next few months. This will be the first move in many months. In contrast, the Australian bank is nearing the end of its raising move. Currencies generally move when the interest rates hike start, not near the end of the raising cycles. Therefore, the obvious advantage is for the Canadian dollar.

The following chart shows both countries' rates since Jan 2008:

Being oriented to Asia's growth, the Aussie dollar greatly benefited last year, while the Canadian dollar, being weighted towards US growth, suffered during that period. Both currencies, however, should be good performers compared to the USD or the ailing Euro.

There has certainly been a strong interest in the Canadian loonie in recent days, with the loonie being up many straight days. This is the chart for FXC, the ETF that tracks it.

It is quite a spectacular chart.

For all other currency ETFs, please see our Tracking Live site.


Here are straddles for both FXC and FXA, computed with our StraddlesCalc tool. These straddles allow an investor to profit from the underlying moving up or down, as long as it moves the necessary amount.

(please click to enlarge)

The maximum moves required may be smaller, particularly for the June options, as there is plenty of time to expiration. Note that the moves or March seem quite low, in the 1% range. Please remember that these are currencies, which normally move very little (or, shall we say, used to move little).

Disclaimer: the author does not have any positions on FXA, FXC or any other currency ETFs. Options are dangerous and may cause 100% loss. Please do your own due diligence.

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