Some currency market observers say the euro is overvalued with similar sentiment extending to the British pound.
Among other major global currencies and relevant exchange traded funds, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is up 5% this year while the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) is showing signs of life, gaining almost 1% over the past 90 days. [Canadian Looks to Rebound]
Give the upside opportunity delivered by other major currencies this year, it is not surprising that investors’ opinion of the U.S. dollar is plummeting, but that could spell opportunity for a couple of ETFs.
“So what’s going to be the catalyst to take the US Dollar a lot higher? Getting back to my original point, I don’t know anyone who is pounding the table on the US Dollar Index. Although this may be somewhat anecdotal, the sentiment data backs it up,” said Eagle Bay Capital founder J.C. Parets.
If bearish dollar sentiment is a bullish, contrarian indicator, and it very well could be, ETF investors will want to focus on the PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP) and the newer WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU). [New Currency ETFs Debut]
The $666.6 million UUP tracks the Deutsche Bank Long US Dollar Index (USDX) Futures Index. That index has a 57.6% weight to the euro, meaning UUP is a predictable beneficiary in the even the European Central Bank engages in quantitative easing to weaken the common currency.
USDU, which debuted last December, will usually feature exposure to 10 currencies but can accommodate up to 20. Currently, the fund devotes 31.3% of its weight to the euro and 19% to the Japanese yen.
Parets notes extreme bearish sentiment surrounding the greenback could be a sign the dollar is poised to pop. That negative sentiment should include the $68.7 million pulled from UUP over the past 90 days.
“The buying opportunities come when the public is too pessimistic about its prospects for gains compared to their opinion over the past year. Big sell-offs don’t happen when everyone expects it. And this data is telling us that the crowd is positioned for a big sell-off. So I’d prefer to take the other side of that,” said Parets.
PowerShares DB US Dollar Index Bullish Fund
