Asian Currency Opportunity

March 31, 2011
By

(This article was first published on Timely Portfolio, and kindly contributed to R-bloggers)

Asian currencies are fundamentally undervalued at an extreme level due to the Central Banks’ focus on the US$.  For those that regularly read my blog or happened to see me in SmartMoney, this will not surprise you,

“And investors can also buy emerging-market stocks in countries whose currencies appear undervalued, potentially seeing double gains from currency appreciation and stock price growth, Russell says.”

At this point, I have no idea where the stock markets of the world go, but fortunately, I do not need to care, since I am not an equity manager.  However, my best method of pursuing Asian currencies comes through emerging market equity etfs, so if I buy EWY Ishares Korea, I am also buying the Korean Won and shorting the US$.  I like all the Asian emerging currencies, but for this post want to focus on the Korean Won to avoid any additional confusion.  See my post Japan Intentional or Accidental Pursuit of Deflation for more in depth discussion of all the Asian emerging currencies.

Yesterday, three years from the 2007-2008 disaster and almost a year from the Flash Crash, the heavens seem to have opened and the skies seem to have cleared for the Korean Won vs the US$, Japanese Yen, and Euro. 

From TimelyPortfolio
From TimelyPortfolio

All of the potential currency profits that have so far been untapped from EWY now seem a real possibility,


via StockCharts.com

but if you’re like me and uncertain about the next direction of equity markets, then a spread trade with EWY long and IWM short can ease your equity fears.  However, feel free to blend the spread to your tastes.  I like to add a little short Japanese Yen.


via StockCharts.com

R code:

require(quantmod)
require(PerformanceAnalytics)

#get asian currency data from the FED FRED data series
getSymbols("DEXKOUS",src="FRED") #load Korea
getSymbols("DEXJPUS",src="FRED") #load Japan

#other symbol options
#getSymbols("DEXMAUS",src="FRED") #load Malaysia
#getSymbols("DEXSIUS",src="FRED") #load Singapore
#getSymbols("DEXTAUS",src="FRED") #load Taiwan
#getSymbols("DEXCHUS",src="FRED") #load China

#invert to get KRWUSD and JPYUSD
asian<-merge(1/DEXKOUS,1/DEXJPUS)

#do dailyReturn so that I can use pretty PerformanceAnalytics charts
#division puts currencies in Japanese yen from US dollar
asianreturn<-merge(dailyReturn(asian[,1]),dailyReturn(asian[,1]/asian[,2]))

#label columns for graph legends
colnames(asianreturn)<-c("KoreaUS","KoreaJapan")

chart.CumReturns(asianreturn["2007::2011"],legend.loc="right",main="Korean Won in US$ and Japanese Yen",ylab="")
mtext("Source: Federal Reserve FRED",side=1,adj=0)

 

Disclosure:  AS ALWAYS, THESE ARE MY OPINIONS AND THE FUTURE IS UNPREDICTABLE.  CONDITIONS CHANGE AND I ADJUST POTENTIALLY WITHOUT DISCLOSURE ON THIS BLOG.  YOU ARE ON YOUR OWN MAKING INVESTMENT DECISIONS, AND IN NO WAY AM I ADVISING YOU.  I TAKE NO RESPONSIBILITY FOR YOUR GAINS OR LOSSES.

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