Tags: Currency | Beats | US | Treasurys

This Currency Beats US Treasurys Every Time

By    |   Wednesday, 22 February 2012 09:33 AM

The Greek crisis is over! The troubles of the world are now resolved!

Those headlines screamed the announcement of the resolution forged by European officials late Monday night. The media tried to push the people to the euro and other "risk" assets. CNBC continually flashed breaking news headlines the Greek crisis has been resolved.

Yet, the euro didn't budge much. Stocks around the world barely moved.

The media's attempted euphoria didn't take hold. It may have been the 53 percent haircut that the private bondholders have had to agree too. It may also have been that we have seen this movie played out too many times in the past few quarters.

Each time we hear about the end of the euro crisis, we get back to the nervousness in just about a week as the deal either unravels or hits some snags.

In this case, I do believe that the euro may not rise too much.

The “ugliest currency at the ball” contest between the U.S. dollar and euro has yet to be decided. There is too much dependence on the LRTO (the European bailout fund) to be enlarged. More euros will be printed and this will be the largest quantitative easing that the eurozone will have ever witnessed.

The smart currency investor will focus on currency pairs outside the USD and EUR pair.

Let’s talk about a currency pair that has risen for 18 out of the last 20 quarters. This currency has been rising against the US dollar since 2005 and has seen some decent gains almost every quarter.

I am talking about the Chinese yuan. For the longest time, we have heard about how the Chinese are manipulating their currency and holding it cheaper intentionally to gain unfair trade advantage.

While I won't deny some parts of that claim, it isn't fair to characterize the yuan in that light without looking at the other side of the argument.

Since 2005, the yuan has risen by more than 24 percent. While the rise hasn't been spectacular and jaw dropping in any given period, it has been consistent and dependable.

The yuan has risen in each of the last 20 quarters except two. The rise in most of these quarters has been well above the US Treasury rate for three months.

During the past five years, the average earnings on the yuan has been about 1.08 percent per quarter or about 4.35 percent per year annualized.

The U.S. Treasury rate (three months) hasn't seen such a rate since January 2008 when the three-month U.S. Treasury rate was 4.7 percent.

What this means is that anyone who has invested in three-month U.S. Treasury bonds since January 2008 would have been better off if they had invested in the Chinese yuan.

Mind you we aren't even beginning to calculate the losses incurred due to capital losses in U.S. Treasurys or the interest gains in the yuan that an investor would have made.

Let us not get caught up in the rhetoric of the politicians. As prudent investors, we shouldn't let politics decide our investment patters. I have invested a small portion of my capital in the yuan since 2007 and have enjoyed an annualized gain of about 4.5 percent per year.

While it may not be the greatest, it has been the most consistent return yielding investment I have had during the past five years.

I expect this trend to continue for time to come. The Chinese economy will continue to grow at a healthy pace and the U.S. dollar will continue to decline. This is about as certain a trend as any and thus we should invest a small portion into this trade and benefit.

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Wednesday, 22 February 2012 09:33 AM
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