With the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) up more than 9% this year, a gain that is better than quadruple that of the S&P 500, it is fair to say the greenback has been the star among developed market currencies.
It is a lesson the British pound is learning…the hard way. The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is off 6.2% year-to-date and sterling’s charts indicate that if the support area the currency is currently flirting with does not hold, downside from there could be significant. [U.K. ETF Update]
“The 1.40′s served as important support on multiple occasions in the mid-1990′s and early 2000′s. In 2007, the Pound briefly topped 2.00 before immediately failing and plummeting back down to the 1.40′s again during the financial crisis. Since then, it has been range bound, reaching as high as the 1.70′s last July,” notes Dana Lyons of J. Lyons Fund Management.
On slightly above average volume, FXB closed at $143.71 last Friday, indicating it is flirting with the critical support area Lyons referenced regarding the pound.
“With the historic rally in the Dollar since that time, the Pound has suffered along with the rest of the global currency world. In the process, the currency’s decline has now brought it right back down into the critical 1.40′s again,” adds Lyons.
Further sterling erosion against the greenback would likely be a boon for the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) and the WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS), two of the more unheralded members of the rapidly growing currency hedged ETF group. [Opportunity With Sterling Hedged ETFs]
Currency hedged ETFs attracted nearly $27 billion in new assets in the first quarter, though DBUK and DXPS relative to their Japan and Germany counterparts. The two ETFs combine for just over $36 million in assets.
However, there are signs some investors are warming to the idea of betting on more downside for the pound with ETFs like DBUK and DXPS. For example, DBUK rose 0.4% last Friday on volume that was nearly seven times the daily average.
Importantly, DBUK and DXPS share something in common with their currency hedged Germany and Japan counterparts: Substantial out-performance of their unhedged rivals. DBUK and DXPS are up an average of 8.3% this year, an advantage of 500 basis points over the iShares MSCI United Kingdom ETF (NYSEArca: EWU).
Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF