Forex Comment Jul 29

To hedge against US dollar decline, think China and Korea 

Gold not the only alternative that glitters

To hedge against US dollar decline, think China and Korea 

(ATF) After a bit of a breather yesterday when gold dropped by more than $50 at one point, the US dollar resumed its decline on Wednesday and at 6pm (HK time) traded at 93.5110 on the dollar index (DXY). It had fallen as low as 93.3970 at 3:45pm.

Gold meanwhile has made a $10 comeback to $1,974.30 (+0.53%).

But in light of rock bottom US interest rates, which can't go much lower even with a super-dovish US Fed, is gold still the best way to hedge against continued dollar decline?

I wouldn't move out of gold just yet. It's a hedge not just against a dollar crash, but also against all sorts of other end-of-the-world kind of stuff.

But any free cash on hand might more profitably be invested in non-US stocks, stocks denominated in stable or rising currencies.

Of those, I'd say the Korean won (KRW) and the Chinese yuan (CNY) the most promising.

The PBoC set yuan central parity at 6.9969 on Wednesday morning. It now trades at 6.9970 – stable just below or slightly above 7 to the US dollar as it has been for the better part of this month.

Chinese stocks on the CSI300 were up today by 2.42%, are up 13.85% for the month, but still have quite a ways to go (12%) relative to the S&P500's 44% rise since the recent low of March 23.

As the Chinese economy is regaining strength more rapidly than any other, the yuan should remain stable or rise and Chinese stocks should at least catch up with if not exceed recent US equities' gains.

The same fundamentally goes for the KRW and the Korean KOSPI Index. The KRW has been steadily rising since hitting a low of 1,285.73 against the dollar on March 19 and now stands at 1,193.17. The KOSPI has risen by about the same amount as the Nasdaq (51%) since mid-March, but arguably has substantially more upside as Korea has defeated the coronavirus and is making a robust comeback.

So, if the glitter of gold is getting rather too blinding for you, there are promising Asian equity alternatives.