ETF Trends
ETF Trends

Everyone seems to hate the euro and many traders are shorting the currency to profit from weakness if the debt crisis worsens. Exchange traded funds tied to the euro’s fortunes could be an interesting play for brave contrarians given extreme bearish sentiment and the recent rush to U.S. dollars.

Speculators were net short the euro versus the dollar by a record high earlier this month, WSJ.com’s MarketBeat reported.

The iPath EUR/USD Exchange Rate ETN (NYSEArca: ERO) and CurrencyShares Euro Trust (NYSEArca: FXE) are trading near 52-week lows on the Eurozone debt crisis. [Euro ETFs and the Debt Crisis]

The euro is also trying to hold the critical 1.30 level versus the dollar.

With so many traders shorting the euro, the potential exists for a “short squeeze” if the euro strengthens and investors scramble to cover.

“Typically when everybody and their grandmother has piled into a trade, it’s a good time to start thinking about moving in the other direction,” MarketBeat reported. “One problem with this idea, though, is that the euro, despite a massive pile of bets against it, has not fallen nearly as far as it did the last time there was a huge wave of short interest.”

In a separate report, the WSJ on Friday wondered whether the single currency can defy “what appears to be the overwhelming consensus” and hold together in 2012.

CurrencyShares Euro Trust is down about 2% year to date. In another example of bearish euro sentiment, short interest in the ETF is 178.4% of shares outstanding, according to ETF Channel.

Euro currency ETFs are caught in a downtrend, says Investors Intelligence technical analyst Tarquin Coe.

“As long as that direction continues the U.S. markets will struggle to hold a sustainable rally. Euro weakness has generally signaled ‘risk-off’’ this year,” he wrote in a newsletter Friday.

Read the disclaimer; Tom Lydon is a board member of the funds for Rydex|SGI.

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.