Favorable monetary policies out of the European Central Bank and and improving economic activity across the Eurozone could support Europe currency-hedged exchange traded fund strategies.
Business activity in the Eurozone rose at its fastest clip so far this year in October, with the IHS Markit’s Eurozone flash composite Purchasing Manager’s Index rising to a better-than-expected 53.7 from September’s 52.6, reports Jonathan Cable for Reuters. Readings above 50 indicate growth in activity.
“Good PMI news as the composite index rose to its highest level since December of last year, driven by both manufacturing and services. Higher input prices are filtering through to output prices,” Holger Sandte at Nordea said.
While economic activity is picking up speed, Eurozone inflation remains depressed. Inflation was 0.4% in September, or well below the ECB’s 2% target.
[related_stories]Consequently, market observers argued that the ECB could even extend its bond purchasing program to further support inflation. The ECB has already spent over a trillion euros buying government bonds, cut its benchmark rate to zero and adopted a negative deposit rate.
SEE MORE: Look to Currency Hedged ETFs as the Euro Continues to Weaken
“The ECB will still need to do more to bring inflation back towards its target on a sustained basis across the euro zone,” Stephen Brown at Capital Economics, told Reuters.
Consequently, the ECB’s extended loose monetary outlook is weighing on the euro currency, which is trading near a seven-month low of $1.0878 on Monday. The euro currency and related CurrencyShares Euro Currency Trust (NYSEArca: FXE) continued to weaken after ECB President Mario Draghi quashed rumors of QE tapering.
“Draghi was dovish because he said that the tapering rumors were wrong and purchases won’t be stopped abruptly,” Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA, told Bloomberg. “They’re likely to extend QE in December and they may do so at the current rate. That’s consistent with the euro weakening.”
Meanwhile, market observers are increasing bets that the U.S. Federal Reserve could hike interest rates in December, further strengthening the U.S. dollar against the euro currency.
Consequently, investors who expect in an improving Eurozone economy, along with a depreciating euro currency, should consider currency-hedged ETF options to gain exposure to the region.
For instance, the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) target Eurozone countries but try to diminish the negative effects of a depreciating EUR – a weakening foreign currency would normally reduce returns on overseas securities when converted back into a stronger U.S. dollar.
For more information on the European markets, visit our Europe category.
CurrencyShares Euro Currency Trust (NYSEArca: FXE)
