CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) and CurrencyShares Japanese Yen Trust (NYSEArca: FXY) are the worst-performing currency ETFs so far this year with declines of more than 7%.
Currency ETFs could see action this week as the Bank of England, the European Central Bank and Bank of Japan all meet and release statements on interest rates.
Also, investors will be looking for any action or hints on further quantitative easing from central banks.
In Japan, investors are “assessing how aggressive the BOJ will be in countering 15 years of deflation after governor Masaaki Shirakawa and his two deputies step down on March 19,” Bloomberg News reports. “Prime Minister Shinzo Abe’s nominee for governor, Haruhiko Kuroda, yesterday said the central bank should consider buying longer- term debt and indicated that open-ended asset purchases planned for 2014 could start this year.”
The yen’s weakness has helped boost Japanese equity ETFs. For example, WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) is up about 26% the past three months. The fund invests in Japanese stocks but hedges its currency exposure to the yen. DXJ is the best-selling ETF so far this year with inflows of about $3 billion. [WisdomTree Japan ETF Creates ‘Windfall’]
“The Japanese government’s nominees for the Bank of Japan’s two deputy governors offered contrasting policy views on Tuesday, as one described a bold path to meet an inflation target and the other often declined to commit to unconventional policy steps,” Reuters reports. “The differing views could raise questions as to how aggressive the BOJ will be as Prime Minister Shinzo Abe pushes for an overhaul of the central bank’s management to encourage bolder monetary measures to end years of deflation.”
Analysts surveyed by Dow Jones Newswires expect the BOJ to keep monetary policy unchanged at its meeting later this week. “But expectations for more easing once a new BOJ governor is installed still abound and helped to drive down yields on 10-year Japanese government bonds to their lowest levels since June 2003,” Dow Jones reports.
Markets will also get policy updates from the European Central Bank and Bank of England later in the week.
“Although we’re not expecting any change of policy at this ECB meeting we do suggest looking quite closely at the language,” said Ian Stannard, a currency strategist at Morgan Stanley, noting in the Dow Jones report the possibility that the central bank might hint at action further ahead. CurrencyShares Euro Trust (NYSEArca: FXE) is off 1.4% this year on a strengthening U.S. dollar. [Rising Dollar ETF Could Halt Rally]
Meanwhile, the Bank of England will “come under intense pressure to inject billions of pounds into the economy when it meets on Thursday after a survey showed business confidence fell in February,” The Guardian reports.
Some big investors are betting the British pound will decline even more. [British Currency ETF Drops as Pound Sterling Hits 3-Year Low]
“Options traders have raised bets to the most in almost two years that it will depreciate against the euro, and strategists are cutting their forecasts at the fastest pace after the yen,” Bloomberg reports.
“You ain’t seen nothing yet,” said Neil Williams, chief economist at Hermes Fund Managers, in the article. “If the world believes there will be significantly more stimulus coming, which I expect, the pound is likely to be under further pressure.”
CurrencyShares British Pound Sterling Trust
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.