The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is up 5.4% year-to-date, making it one of the better-performing exchange traded funds tracking a major developed market currency, but FXB could be tested this week.
“The pound may be in for a bout of volatility, according to analysts at ING Groep NV, after a week that saw the currency confined to its tightest range versus the dollar in almost three year,” reports Bloomberg. “Sterling slipped to its lowest level in six weeks against the dollar on Aug. 10 as data signaled sluggish U.K. growth, prompting money markets to push back bets on the timing of a Bank of England interest-rate hike. Morgan Stanley revised its forecasts to predict parity in euro-sterling, which would be a record.”
Like other major currencies, the pound is besting the slumping dollar this year. The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the tracking exchange traded fund for the U.S. Dollar Index, is one of the worst-performing currency exchange traded funds this year. UUP is lower by almost 9% year-to-date.
“The implied probability of a 25-basis-point rate increase by year-end was 23 percent, according to MPC-dated SONIA, sliding from 50 percent before the BOE’s policy announcement on Aug. 3, when it kept its key rate at a record low and cut the economy’s growth outlook,” according to Bloomberg.
Currency hedged ETFs, including the iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU), WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK), are benefiting from sterling weakness.
Without a hedge against volatility, U.S. investors interested in the growth in U.K. markets would be subject to the wild swings in the pound sterling. Since British stock are denominated in the pound sterling, a weaker GBP would mean that USD-denominated returns would be lower after a depreciating in the pound sterling.
The iShares MSCI United Kingdom ETF (NYSEArca: EWU), the largest U.K. ETF trading in the U.S., is not currency hedged, meaning it can be vulnerable to pound weakness.
For more information on the GBP, visit our British pound category.
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.