Down 7.3% year-to-date, the CurrencyShares Euro Currency Trust (NYSEArca: FXE) is one of 2014’s worst-performing developed market currency exchange traded funds.
In most years, even periods of euro weakness, October would be the time currency traders would consider being long the euro because of the common’s currency favorable late-year seasonal trends. However, that favorable seasonality will be put to the test this year. [Monitor These Currency ETFs]
“In the short fifteen year history of the euro currency, the market seems to make a bottom around the third week of October; then we see a tendency for price gains against the U.S. dollar by yearend. Many factors could be at play to explain this, such as multi-conglomerate U.S. corporations’ need to make fiscal year-end book adjustments as well as to make foreign payroll and bonuses,” write Christopher Mistal and Jeffrey Hirsch for the Stock Trader’s Almanac.
Trading around seasonal trends can prove effective as long as traders combine seasonality with other indicators. And while FXE is fast-approaching its ninth anniversary, indicating there is a sufficient track record of late-year seasonality to measure, other factors need to be considered before investors dive into the euro as a yearend trade.
Important factors to consider not only the looming end of the Federal Reserve’s quantitative easing program, which is rewarding the U.S. dollar, but also when previous rounds of QE started. The first round of QE was announced in late November 2008, in the heart of favorable euro seasonality. [Investors are Flocking to Dollar ETFs]
Former Fed Chairman Ben Bernanke hinted at QE2 as the euro was approaching its seasonal sweet spot in 2010 while Operation Twist was unveiled right around the time of the euro’s favorable seasonal period in 2011. In 2012, Bernanke would start QE3 speculation during the euro’s seasonally strong period.
This year, there will be no such announcements from the Fed. Add to that, 2014 is the first time in the euro’s 15-year history that the European Central Bank is actively engaged in monetary easing.
Still, some investors are betting on the idea of a euro rebound. FXE took in almost $6.3 million in new assets last week, but is still lighter by nearly $23 million for the year. However, $6.3 million is nothing compared to the nearly $155 million investors poured into the PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP) last week.
CurrencyShares Euro Currency Trust
