The euro is weakening against the U.S. dollar ahead of the European Central Bank announcement on Thursday.
Investors interested in gaining exposure to the Europe’s stock market but are wary of further currency risks may look to hedged exchange traded fund options.
The euro currency depreciated Wednesday to $1.0964, with the CurrencyShares Euro Currency Trust (NYSEArca: FXE) down 0.2%. FXE has dropped 1.6% over the past month.
SEE MORE: What Trouble Lurks for the Euro ETF?
Traders are easing back on the euro a day before the ECB is due to meet, hedging bets on whether ECB President Mario Draghi will provide any clues that the central bank will begin tapering its bond purchasing program.
“Ahead of the ECB there’s a little bit of lightening up of the euro. There’s some focus on the possibility that Draghi will push back very aggressively against recent talk of tapering,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp, told Reuters.
The ECB’s bond purchasing program has helped depress yields, support the local debt market and weaken the euro currency. The EUR, though, strengthened this year against the USD on speculation that the ECB was reaching its limit on easing.
Deutsche Bank AG projects that the EUR could continue to depreciate against the USD, predicting a $1.05 end price by the year-end, compared to median estimates of $1.10, reports Lananh Nguyen for Bloomberg.
“We’re at $1.05, which in the scheme of such a narrow range feels aggressive. But really it could be a two-day trading range if the Italian referendum voted ‘no’ for example, and the Fed soon thereafter hiked rates, you’d get to $1.05 fairly easily,” Alan Ruskin, global co-head of foreign-exchange research at Deutsche Bank, told Bloomberg, referring to a vote on constitutional change sin Italy and the Federal Reserve’s December policy meeting.
SEE MORE: A Europe ETF That Hedges Currency Risks When It Needs To
With the euro currency weakening against the greenback, Europe currency hedged ETFs, which try to diminish the negative effects of a weakening domestic currency, have outperformed. Over the past three months, the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) was up 5.1%, iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) rose 4.9% and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) gained 5.1%.
Meanwhile, the non-hedged iShares MSCI EMU ETF (NYSEArca: EZU) added 3.7% and the SPDR EURO STOXX 50 (NYSEArca: FEZ) advanced 2.8% over the past three months.
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