G10 Currency ETF (DBV): Indirect play on China yuan

“Short of being a professional currency trader on an institutional desk, there is no easy and direct way to trade China's currency, the yuan,” notes Asian expert Keith Fitz-Gerald.

In his top-notch new service, The New China Trader, he explains, “To do so, we need to look at indirect opportunities, such as through the PowerShares DB G10 Currency Harvest Fund (ASE: DBV)." For more sophisticated investors, Keith offers the following analysis.

“One of the world's biggest mysteries is what China will do with the $1.4 trillion worth of currency reserves it's sitting on. Its currency reserve is the single largest currency stockpile in the history of mankind, and it gives the Chinese potentially unprecedented power when it comes to influencing the world's major currencies.

“They will spend it. In fact, the process is already beginning, and that suggests it's time to ‘trade the untradable.’ China is going to throw a big rock into the global ‘waters.’ We know it's coming yet we can't buy it. But we can prepare for the ripples.

“At the present time, every major currency pair is traded in real time around the world to the tune of trillions of dollars a day. Yet, the Yuan is not included.

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“This is particularly true for currencies that belong to the countries referred to as the G10. In 1971, this group replaced the world's fixed exchange rate regime with the fiat trading mechanisms in use today. And therein is the opportunity.

“When China begins to release its reserves, it will affect the relationships between the ‘G10’ currencies - and likely in a big way. These currencies are: U.S. dollars, euros, Japanese yen, Canadian dollars, Swiss francs, British pounds, Australian dollars, New Zealand dollars, Norwegian kroner and Swedish kronor.

“Currencies traders know this and have been actively engaged in a simultaneous series of transactions known as ‘pairs trading’ to capitalize on the movement when it occurs.

“It's a sophisticated strategy that's traditionally beyond the capabilities of all but the most savvy individuals and professionals. Until now.

“The folks at Deutsche Bank recently created the PowerShares DB G10 Currency Harvest Fund, an ETF that offers individual investors the chance to participate in a very sophisticated institutional strategy.

"The strategy uses a single investment vehicle that offers easy access to the systematic returns so prevalent in currency markets. Here's how it works in a nutshell.

"The funds managers simultaneously buy futures contracts on the strongest three G10 currencies as determined by the highest interest rates. At the same time, they are shorting futures contracts on the weakest three G10 currencies which are determined by the lowest interest rates.

“Then, the contracts are collateralized by futures contracts using the safest financial instruments in the world, 90-day U.S. Treasury bonds. The portfolio is rebalanced quarterly.

“Like anything, there are no guarantees though. The fund may take some getting used to given current market volatility, and we may be early to the party. But like many things coming out of China these days, there will be no warning when the diversification process begins.

“China is growing increasingly frustrated with a weaker dollar by the minute, which points to this process getting under way in earnest sooner rather than later. If we are right, every major currency pair will readjust in the process, again without warning.

“If we are wrong, DBV still offers meaningful diversification, at a time when the markets seem to be tripping over their own two fat feet closer to home. Buy PowerShares DB G10 Currency Harvest Fund and let it run with a 25% trailing stop.”