UBS links notes to strengthening Chinese renminbi; note contrary to recent movements, advisor said

By Kenneth Lim

Boston, Oct. 9 - UBS AG's dollar-bearish notes linked to the Chinese renminbi offers an unusual view of the exchange rate given recent trends, an investment advisor said.

UBS plans to price zero-coupon principal-protected notes due Oct. 31, 2011 linked to the Chinese renminbi against the U.S. dollar.

If the currency return is positive - meaning that the renminbi appreciates against the dollar - investors will receive the gain times a participation rate of 115% to 145%. Investors will receive at least par.

Strengthening dollar

The dollar-bearish view is unusual in light of the recent strength in the U.S. dollar, the advisor said.

"Because of the widespread uncertainty not just in the U.S. but also around the world, we've actually seen the U.S. dollar appreciate because people are looking for safe places to park their money," the advisor said. "Also, some of the emerging currencies haven't been doing well because if the global economy is bad, and the U.S. is in a recession, demand for their exports could be lower."

But the UBS product's position may not be that unusual considering the term of the notes, the advisor added.

"I guess it's a three-year product, so if you think that what's going on right now is probably a short-term trend, you might think that this makes sense, the advisor said.

The product could also be suitable for investors who thought that China's economy will continue to do well and its government may continue to allow its currency to appreciate, the advisor said.

"If you just look at what's been going on the past week, this might look like it's going against the grain, but when you look beyond that, and when you consider some of the assumptions behind a view like this, it can be very reasonable," the advisor said.

Limited retail interest

The advisor said small retail investors have not traditionally been highly interested in currency structured products.

"Most of my clients are small retail investors, and most of them aren't really comfortable moving beyond equities and bonds," the advisor said. "But those asset classes are doing so poorly now, it could actually be a good time to start learning about other asset classes."

A principal-protected product linked to a foreign currency would be a good way to start, the advisor said.

"Principal protection means a lot for retail, especially for the small-time investors," the advisor said. "And especially if you're investing in a new asset class for the first time. I guess if you want to gain some exposure to the Chinese currency, you could do worse than a structured solution like this."

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