The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) fell nearly 2% last week, but with the Federal Reserve on course to raise interest rates in the coming months and other developed market central banks going in the opposite direction, remaining long the greenback could continue to be a winning trade.
Currency traders still believe that the U.S. dollar could reach parity with the euro currency, especially as the U.S. continues to generates strong economic data and the European Central Bank engages in a quantitative easing program.
“Irrespective of the timing of the Fed’s decision to tighten credit anew, fundamental patterns should pave the way for a relatively stronger US currency in the period ahead. Comparatively low or maybe negative consumer inflation forecasts of the US, Eurozone, UK, Japan and Switzerland will confer little or no benefit on any of their currencies given the spirited efforts of their corresponding central banks to defend their economies against deflationary headwinds threatening to undermine the recoveries of each country,” said S&P Capital IQ in a new research note.
One exchange traded fund investors for taking advantage of the global currency wars is the so-called carry trade ETF, the PowerShares DB G10 Currency Harvest Fund (NYSEArca: DBV). Employed primarily by professional currency traders, the concept behind the carry trade is easy to understand. In a carry trade, the trader borrows or sells a low interest rate currency uses the proceeds to buy a high interest rate equivalent. [A Look at the Carry Trade ETF]
DBV “aims to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates. In March, it was long the Australian dollar, the Norweigan Krone and the New Zealand dollar, while short the euro, the Swedish krona and the Swiss franc,” according to S&P Capital IQ.
Being short the euro and krona seems advisable, particularly after Sweden’s recent move to take its repo rate further into negative territory. However, a potential headwind for DBV is its long Aussie position at a time when it appears clear the Reserve Bank of Australia will lower rates again this year. [Sweden ETF Rises After Riksbank Lowers Rates]
S&P Capital said that hedging the British pound “appears wholly justifiable” and the research firm sees little reason to be long the yen against major global currencies, ideas that shine a light on the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF).