There Are Better Currency ETFs Than Swedish Krona ETF
The Dynamic Wealth Report
July 21, 2008
Don't Make This Mistake Trading Currencies
by Brian T Mikes, Managing Editor
This weekend I spent a good deal of time thinking about my time
overseas. I remember fondly my flat in London, traveling on the tube,
and drinking pints in so many pubs. I thought about the time I took the EuroStar down to Paris and the numerous cafes and museums I visited. I
wouldn’t trade these experiences for the world.
My cousin has been accepted into an elite program where she’ll be
studying in Europe. Over the next year her travels will be focused on
Switzerland and the surrounding countries. I’ve got to admit, I’m a bit
jealous.
We spent a good deal of time talking about the different European
currencies, exchange rates, and currency fluctuations. We even discussed
the best ways to convert US Dollars into local currencies.
Most people don’t realize . . .
There’re many types of currencies. Some are much more important than
others. The top tier is anchored by the US Dollar. Many smaller
countries have fixed their exchange rate to mirror the US Dollar. This
helps eliminate aggressive speculation, and essentially ties their
currency values to the world’s largest economy. Not necessarily a
bad idea. . . unless the currency value is declining.
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But, I’m going off topic here – Back to the major currencies.
Along with the US Dollar, other major currencies include the British
Pound, the Japanese Yen, the Australian Dollar, the Canadian Dollar, the
EuroZone Euro, and the Swiss Franc. These are the “Blue Chip
Currencies”. In our very successful
Currency Options Insider Newsletter we focus on trading options on these major
currencies.
Most of the world’s economy is built upon these seven major currencies.
All have active and liquid markets and are managed by strong central
banks. Just like the US Federal Reserve, the other Central Banks work to
keep economies growing while holding down inflation.
The junior currencies.
Many new currency or forex traders also watch the junior currencies.
These include the Mexican Peso, the South African Rand, the Singapore
Dollar, and the Swedish Krona, just to name a few. These countries have
smaller economies, but they are stable and growing on the global markets.
Sometimes these junior currencies can be very exciting to trade.
Sometimes you can get badly burned.
Just look at the Swedish Krona. It’s been Sweden’s currency since 1873,
and it’s often referred to as the “Swedish Crown.” The Swedish economy
is quite stable, and it’s in the top 20 of the world based on GDP. Their per capita GDP is more than $36,000 despite record tax levels. The country is heavily oriented towards foreign trade – which serves
them well in prosperous times.
The Swedish Riksbank is the oldest central bank in the world. It was
founded in 1668. They’ve done a great job of growing the country while
holding down inflation. Since the mid 1990s, their inflation rates are
some of the lowest in Europe.
What’s all this mean?
It makes the Swedish Krona a very interesting investment.
Many people have been rushing out to trade the Swedish Krona. One of the
easiest ways to put this in your portfolio is by purchasing an ETF. The
CurrencyShares Swedish Krona Trust (FXS) is an easy way to gain exposure
to the Swedish currency.
But I wouldn’t put my money there.
See, if you dig a little you’ll sometimes find a problem. Sweden’s scheduled to
join the European Union and become part of the EuroZone. This means
they’ll need to convert over to the Euro.
Here’s the problem. According to the prospectus, the fund is based on
the Swedish Krona / US Dollar exchange rate. This means that you buy
into the fund with US Dollars and when you sell you get back US Dollars.
As the country gets closer to becoming part of the EU, the Krona should
start trading in lockstep with the Euro. This isn’t going to happen
overnight, but it will at some point in the next few years. If you
buy this as a long term investment, you’ll be quite surprised when
your Krona trade starts looking like the Euro.
Don’t waste your time with the Swedish Krona. There’re other currencies
you’d be better off owning in the long run.
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