Anti-dollar bias fuels appetite, skepticism for bearish structured notes tied to the greenback

By Emma Trincal

New York, Sept. 8 - Products that give investors the option to bet against the greenback while protecting their principal are being offered by some structurers in a move that reflects what advisors and currency strategists see as a growing bearish sentiment about the U.S. dollar.

Credit Suisse, Nassau Branch, for instance, plans to price two different offerings of zero-coupon 100% principal-protected bearish ProNotes linked to the performance of a basket of six currencies against the dollar that give investors a payout when the dollar declines relative to the underlying basket. Both securities are structured the same way and both are 100% principal protected. The only difference is the respective maturities and the potential payouts.

"If you believe that the dollar is going to depreciate, these structured notes would be a way to play it," said John Moore, founder of John Moore & Associates Inc., a financial planning firm in Albuquerque, N.M., who looked at the offerings.

Dollar bears are out there

"I see many dollar bears out there, including among my clients. But if I had to pursue this theme, I would prefer to do it through an ETF and not have it wrapped into a note," Moore said.

To be sure, bearish dollar-theme ETFs have had a good run lately. One of those, the PowerShares DB US Dollar Index Bearish ETF, is up 6% year to date and 15% since its lowest point this year in March.

With expectations of a U.S. economic recovery and a reversal of the flight-to-quality trade, the dollar Tuesday fell to its lowest level against the euro this year at 1.4535 per euro. According to a currency trader, investors are selling dollars to buy higher yielding assets such as U.S. stocks and emerging-market currencies.

"Even if long-term the hope of a U.S. economic recovery will be good for the dollar, in the short term it creates a dollar sell-off as investors are looking to buy higher yielding assets," he said.

One of the Credit Suisse offerings consists of notes maturing Oct. 4, 2014 with a payout at maturity of par plus 155% to 170% of the absolute value of any basket loss. The other notes have a shorter term as they are due Oct. 4, 2012. The payout is only par plus 100% to 110% of the absolute value of any basket loss. In both cases, the exact upside multiplier will be set at pricing.

"Currencies move a certain distance within a certain period. With a shorter term, there is less chance of a bigger move," said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co. in New York explaining why the underwriters may offer more leverage with the longer-dated product.

Browne said that she agrees that the "dollar bears" are "out there." However, she said that her firm takes a contrarian view and is bullish on the dollar.

"From reading the press, it seems like we're in the presence of a lot of bears. Our view is different. The dollar is going to be stronger. We're not there yet. But there are signs of a U.S. recovery and interest rates differential are moving in favor of the dollar," she said.

Some investors, looking at the Credit Suisse zero-coupon notes, expressed a similar skepticism, whether it's based on their short-term view on the dollar or on their analysis of the products' structure.

"I see a lot of borrowing from the government and the dollar is probably going to be weaker but we don't think it's going to be dramatic enough to have a place in our portfolio right now," said Moore.

The madness of the crowds

"If you're bearish on the dollar, it looks like a pretty nice deal," said Mark Trimmer, a financial adviser at Applied Assets, LLC, a financial planning firm in Albuquerque, N.M. "But it's conventional wisdom to be bearish on the dollar. And conventional wisdom is subject to doubt in my opinion."

"It's very difficult in the short term to bet against the dollar," Trimmer said. "The crowd is saying that the dollar is going to depreciate. The crowd is usually wrong."

He said that most people bet against the dollar right now because they see in the large U.S. budget deficit the potential for inflation. "People think inflation is there. We don't see it coming. Inflation is inevitable but it's not going to happen short-term, probably not for the next 24 months," said Trimmer.

The underlying matters

If given the choice between the three-year and five-year notes, Trimmer said that he would opt for the longer-dated security. However, he still would not use the five-year product because the currencies composing the underlying index are currencies of developed countries.

"The heavily undervalued currencies, those that are the most likely to appreciate against the dollar, are in the emerging markets countries, the BRIC [Brazil, Russia, India and China] currencies and Australia, not in developed countries. I don't think I would want to be bet against the dollar based on this basket, even for five years," Trimmer said.

The underlying currencies of the two zero-coupon principal-protected bearish ProNotes, which use the U.S. Dollar Index are the euro with a 57.6% weight, the Japanese yen with a 13.6% weight, the British pound with an 11.9% weight, the Canadian dollar with a 9.1% weight, the Swedish krona with a 4.2% weight and the Swiss franc with a 3.6% weight.

Trimmer said that in general he likes to offer his high-net-worth clients structured products because of the low correlation of such investments and for diversification purposes. But the ProNotes would not fit his needs, he said.

"I would go for the three-year, but with a basket of emerging-market currencies," Trimmer said.

Even with the principal-protection feature, Trimmer sees too much risk. "There is a massive amount of uncertainty with currencies. It's hard for me to say, I'd want to bet against the dollar even five years out," he said.

Rather than getting principal protection, Trimmer said that he would rather use a mix of municipal and corporate bonds to generate similar returns and still feel comfortable with the risk. "I can do better than 10% for my clients and still feel better with my downside," he said.

Both notes are expected to price on Sept. 30 and settle on Oct. 5.

Credit Suisse Securities (USA) LLC is the underwriter.

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