Four of the Best Currencies to Invest in for 2012

August 22, 2012 at 09:53 AM EDT

If you had to pick one word to describe the outlook for the world's major currencies heading into 2013, it would have to be "inconclusive."

Since late May, none of the leading currencies has managed to establish a prolonged trend, with choppy action being driven by continued economic instability in Europe, a sluggish recovery in the United States and slowing growth in the Far East.

Even the Japanese yen, which has been one of the strongest currencies the past few years and held fairly steady through most of the summer choppiness, has weakened in recent days in the wake of a slowing Japanese economy and falling export business, much of the latter blamed on the strong yen.

And the indications are the world's major currencies will likely stay that range bound for the remainder of 2012. Investors can expect price movements to be driven by short-term speculative reactions to each new economic report, unexpected developments in the U.S. election campaign and the continuing failure of European bailout proposals.

So, what's a currency-conscious investor to do?...

The Best Currencies for 2012 As was the case in the early part of 2012, the answer is to continue to look beyond the mainstream to find the best currencies to invest in.

In Money Morning's "Outlook" series forecast for currencies, released in December, Global Investing Strategist Martin Hutchinson predicted the three "must-own" currencies for 2012 would be the Canadian dollar (CAD), the Chilean peso (CLP) and the South Korean won (KRW).

All three hit the mark, rising sharply in the first quarter of the year.

The won climbed to a high of 1115.96 per U.S. dollar in early March, pulled back to a low of 1185.62 in late May, and is now higher again, quoted last week at 1132.41, with the strength based on Korea's low debt, balanced government budget and current accounts surplus. All three factors continue to work in the won's favor, but sluggish Western economies could slow exports and keep a lid on the currency.

Both the Canadian dollar and Chilean peso were plays on natural resources as well as economic strength, and both did well on that basis. However, Chile's natural resource base is more narrowly focused than Canada's, and that could spell trouble ahead for the peso.

It hit an 11-month high of 474.98 pesos to the U.S. dollar on Aug. 9, but fell back sharply on reports of slowing economic growth in China, which imports huge amounts of Chilean copper.

That, coupled with news from Tokyo that Japan would need less copper than expected for post-earthquake/tsunami reconstruction, triggered a one-day drop of 1.3% in the price of copper futures traded on the Comex market in New York - and sparked a decline of almost 2.0% in the peso, which was quoted last week at 482.95 per dollar.

As a result, only the Canadian dollar (CAD) remains on our list of the top currencies to hold for the remainder of 2012 and into 2013. As before, that choice is based on Canada's sound banking system, its smaller budget deficit and its wealth in energy and mineral resources.

Plus, it's the only one of the major currencies to establish a solid trend over the past three months, rising steadily from an early June low of 1.0447 to the U.S. dollar to 0.9879 late last week, just barely off the 12-month high of 0.9868 set in late April.

That trend should continue, based on recent Canadian economic reports and the lure of relatively attractive interest rates, with the CAD possibly approaching 0.9700 by year-end.

Three More Currencies to Invest In Aside from the Canadian dollar, the Australian dollar (AUD) is also a strong choice based on resource strength.

Although growth has slowed a bit in China and Japan, Australia is the closest source of the raw natural resources those countries need.

Australia's own economy has also held up much better than other countries with closer ties to Europe, and though there's some concern the strong currency could hurt exports and thus growth, the Reserve Bank of Australia has shown no interest in cutting interest rates. And, as with Canada, the higher rates make Australia a good place for foreign interests to park cash.

That's why the Australian dollar has also trended sharply higher over the past three months, rising from a June 1 low of 1.0423 to the U.S. dollar to a recent quote of 0.9525. If the trend continues to year-end - and current forecasts indicate it should - the AUD could surpass the high of 0.9212 to the U.S. dollar that it set last February.

The third currency of interest right now is the Mexican Peso (MXN).

Mexico has its problems - most notably a government challenged by the drug cartels and internal violence - but the peso has benefited from strong speculative interest among currency traders, who want exposure to the American markets without having to hold dollars. (Mexico is the third-largest U.S. trading partner, behind only Canada and China.)

Long peso positions in the foreign-exchange (Forex) markets rose to their highest level in four months last week - nearly 82,000 contracts - and this has helped push the Mexican currency to 13.1274 pesos to the dollar, up from a low of 14.5955 on June 1. As with the Australian dollar, a continuation of that trend could carry the peso to a new high before year-end, topping the 12.6825 mark set in March.

For those looking beyond the New Year, Money Morning Chief Investment Strategist Keith Fitz-Gerald continues to recommend acquiring holdings denominated in the Chinese yuan (CNY).

He notes that, though the yuan has been under pressure since the release of China's second-quarter growth figures, "that doesn't change the currency's long-term attractiveness, nor undermine China's ascendency to global economic leadership."

He also expects the yuan to continue gaining strength against the dollar because of China's ongoing efforts to bypass the U.S. currency through the establishment of yuan-denominated swap agreements with major trading partners, thereby further weakening the dollar's role as the world's reserve currency.

For those leery of direct yuan investments, Fitz-Gerald recommends utilizing an exchange-traded fund for access, purchasing shares in the Wisdom Tree Dreyfus Chinese Yuan Fund (NYSEArca: CYB).

However you choose to do it, focusing your investments on currencies that are strengthening against the dollar is one of the best ways to put extra cash in your pockets.

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