High Yielders Back In Fashion

[ForexClub]

High-yielding currencies are becoming even more attractive than they were before.

Once upon a time, investors turned to the currencies of emerging-market and commodity countries with high interest rates only at times of supreme confidence when taking risks appeared like a good idea.

Now, however, as major lower-yielding currencies continue to trade in pretty narrow ranges and the growth projections of the major economies continue to fall, high yielders are being bought more consistently.

First of all, there is the widening growth gap with the so-called G4--the U.S., the euro zone, Japan and the U.K.

Not only are high yielders pulling out of the credit crunch much more quickly and sustainably, but their yields are marching higher at times when the interest rates of most major countries remain frozen at low levels.

Recent export data from China showing that exports to other emerging markets in January and February were nearly double the level they were at a year ago only contribute to the impression that growth in these economies will continue to accelerate.

Nigel Rendell, senior emerging markets strategist with RBC Capital Markets in London, points to the 4.6% growth expected in emerging markets this year, even if China is excluded. With China, growth should be 6.1%.

Of course, there are risks that inflationary fears will force China to slow its own growth and dampen some of the more optimistic forecasts.

Nevertheless, a shift in investor interest should ensure that support for high-yielding currencies continues.

The global strategy team at The Royal Bank of Scotland pointed to rising concern about the sovereign debt risks within the G4, as many of these countries struggle to manage their massive budget deficits.

As credit agencies circle, issuing warnings of downgrades, major currencies are losing much of their attraction.

By contrast, the debt burdens of high yielders are much smaller and their deficits much more manageable, ensuring that investors are much more comfortable.

"The market is demanding a lower-than-normal premium for puts in the higher-yielding currencies," the RBS team stated.

According to RBC's Rendell, there is still plenty of room for portfolio adjustment into these currencies as well, given that U.S. funds are very underweight with emerging markets accounting for only 2% of the assets of the top 200 U.S. defined-benefit pension plans.

So, although high yielders have already posted significant gains in recent weeks, many will probably continue to outperform, especially if the major G4 economies continue to show such slow progress in their recovery from recession.

The main currrency pairs kept to well established ranges overnight, while on the events front China reported February inflation at +2.7% on the year and the Reserve Bank of New Zealand kept rates on hold at 2.5% with Governor Bollard saying a hike should come in the middle of 2010.