Barclays' buffered Super Track notes on currency basket seen as bullish play on commodities

By Emma Trincal

New York, Aug. 26 - Barclays Bank plc's upcoming 0% buffered Super Track notes due Aug. 30, 2012 linked to the performance of a basket of currencies relative to the euro are an indirect play on commodities given the choice of the four countries picked for the basket, a source said.

The equally weighted basket includes the Australian dollar, Brazilian real, Canadian dollar and Norwegian krone, according to an FWP filing with the Securities and Exchange Commission.

If the basket return is positive, the payout at maturity will be par plus 200% to 210% of the basket gain. The exact participation rate will be set at pricing.

Investors will receive par if the basket declines by 20% or less and will lose 1% for every 1% decline beyond 20%.

According to the prospectus, the underlying strategy is a bearish bet on the euro since the value of the basket appreciates when the euro weakens relative to the real, Australian dollar, krone and Canadian dollar.

Short the euro

"It's less of a bearish bet on the euro. It's more of a bullish play on commodities," said Douglas Borthwick, head of trading at Faros Trading, a forex execution firm in Stamford, Conn., commenting on the basket.

"Australia, Brazil, Canada and Norway, those four are seen as big commodity-exporting countries. Taking a bullish view on commodities, that's the classic way this basket is used," he said, declining to comment on the notes themselves.

"You can buy gold. You can buy oil. Or you can do this," he added.

Short the dollar

Rather than being short the euro against the currencies of those commodity-producing countries, Borthwick said that his firm's preferred strategy is to bet against the U.S. dollar in relation to the euro.

His firm's bearish bet on the U.S. dollar is based on the expectation that more quantitative easing by the Federal Reserve is coming. In addition, the firm predicts that China will have to buy fewer U.S. dollars in order to let the renminbi appreciate.

"The basket makes sense. But we prefer shorting the dollar versus the euro. We think it's a better trade," he said.

Homework required

Potential investors in the notes may like the structure as well as the asset class. However, the research needed in order to pick the right strategy may be a setback for some.

Steve Doucette, financial adviser at Proctor Financial, said he has been looking for a good currency-linked note since the beginning of the year but has not found one yet.

"Eight or nine months ago, we thought of doing something. But you have to do a lot of research with currencies. It's an asset class in and of itself," he said.

"After we do our quarterly review, we will definitely take another look at currencies. We like the fact that this asset class has a very low correlation to other asset classes, like stocks and bonds."

Attractive structure

Doucette added that he might consider this deal because he likes the structure of the notes.

"I would have to do my research. But the structure itself matches some of our requirements. Getting leverage without a cap is a rarity. If your bet is wrong, that 20% buffer is a nice hedge. And two years is a reasonable term," he said. "So we may actually look at it."

Currencies as an underlying are not as popular as equities, rates or commodities, according to data compiled by Prospect News.

Only $1.24 billion of currency-linked notes have priced so far this year, or 3.25% of the total U.S. volume. It's a relative decline from last year's comparable period, which saw the sale of $1.19 billion, or 5.23% of total volume.

The shrinkage of currency-linked issuance this year despite its growth in absolute terms and more deals priced this year - 129 so far versus 72 for last year at the same time - has to do with the overall growth of the market. Total issuance this year across all asset classes has reached $38 billion, a 68% surge from last year's comparable period, according to data compiled by Prospect News.

One explanation could be that investors are not always comfortable with the asset class, sources said.

"The retail side of the forex market is big in Europe and Asia, but not so much in the U.S.," said Borthwick, commenting on the currency market as a whole. "It could be because people travel less in the U.S."

For Doucette, currency investing requires more knowledge than other asset classes.

"You really have to do your homework. Historically, currencies have been done by the institutional folks. Retail investors are not necessarily familiar and comfortable with the arbitrages between those currencies," he said.

"But it's an interesting asset class for the diversification, and that's why we want to take a closer look."

The notes (Cusip: 06740PND4) were expected to price Thursday and settle Tuesday.

Barclays Capital Inc. is the agent.

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