The Federal Reserve and European Central Bank are looking at diverging monetary policies where we could see higher interest rates in the U.S. and greater stimulus across the pond. Consequently, international investors and currency exchange traded fund traders should be wary of the currency implications.
While the Fed has not pulled the trigger on a rate hike, the ECB could extend its stimulus measures before the end of the year, reports Michael Hunter for the Financial Times.
“We expect the ECB to announce more QE before year-end, extending the… program beyond September 2016 by six to nine months,” Philippe Gudin, an analyst at Barclays, told the Financial Times. “Overall, we expect a ‘buy the rumor, sell the fact’ type price action in the euro rates market going into and after an easing announcement.”
The ECB will hold a press conference Thursday, October 22. Consequently, in the event the ECB does decide to add quantitative easing, the euro currency could further depreciate against the USD.
Currency traders can track a strengthening U.S. dollar with the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Additionally, the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) tracks the USD against a broader basket of developed and emerging market currencies.
Alternatively, aggressive currency traders can also capitalize on the turn in the European euro through inverse ETF options. For instance, the ProShares Short Euro (NYSEArca: EUFX) is designed to provide 100% of the inverse, or opposite, return of the U.S. dollar price of the euro, on a daily basis and the ProShares UltraShort Euro (NYSEArca: EUO) provides 200% of the inverse return of the U.S. dollar price of the euro on a daily basis. Additionally, the Market Vectors Double Short Euro ETN (NYSEArca: DRR) tracks the Double Short Euro Index, which also provides a -200% exposure to the euro. [Inverse Euro ETFs to Hedge Against ECB’s Willingness to Expand QE]
Since the October 14 low, UUP has gained 1.9%. Meanwhile, the CurrencyShares Euro Currency Trust (NYSEArca: FXE) dipped 1.4%.
Since its October 14 high, the euro has depreciated 1.3% against the greenback. The EUR is now trading at $1.1322.
On the other hand, if the ECB does not make a decision on quantitative easing this week, those who “buy the rumor, sell the fact” may want to take a look at the other side of the currency trade with ETF options.
For instance, for further U.S. dollar weakness, the PowerShares DB US Dollar Index Bearish Fund (NYSEArca: UDN) takes the inverse or short performance of the U.S. dollar against the same basket of six major currencies as UUP.
PowerShares DB U.S. Dollar Index Bullish Fund
For more information on global currencies, visit our currency ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.