The CurrencyShares Euro Currency Trust (NYSEArca:FXE), which tracks the euro’s price movements against the dollar, is one of this year’s best-performing developed market currency exchange traded funds. Aided by some comments from European Central Bank (ECB) President Mario Draghi, FXE jumped 2.6% last week, bringing its year-to-date gain to over 8%.
The Eurozone macroeconomic environment has steadily improved, with a significant uptick in manufacturing and services PMIs over the end of 2016. Eurozone growth may continue to pick up speed ahead after the European Central Bank revealed increased loan demand and easing of terms and conditions on new loans to help stimulate the economy.
Other economic data points indicate the euro could continue higher against the dollar, the latter of which is lagging in spite of the Federal Reserve hiking interest rates twice this year.
“New orders are often viewed as leading indicators of the overall PMI index and the spread between these two series is often indicative of the direction of the USD/EUR, with a lead of about 10 months. German new orders outpacing US new orders by the widest margin since 2007 suggests plenty of runway for the euro to rally against the USD,” reports ETF Daily News.
Political uncertainty continues to linger in Italy as well. Former Prime Minister Matteo Renzi resigned in December following a no-confidence referendum. At the time, some market observers believed Renzi’s resignation could lead to early elections and a rise in support for the populist anti-euro Five Star Movement. The party would seek to carry out a referendum on Italy breaking away from the Euro area.
Related: Traders Get Bullish on Euro ETFs
Aggressive, bearish traders can consider the ProShares UltraShort Euro (NYSEArca:EUO). Underscoring the euro’s prominence on the global currency stage and investors’ willingness to bet on weakness for the currency, EUO is one of the largest currency ETFs trading in the U.S. Another idea for euro bears to consider is the VanEck Vectors Double Short Euro ETN (NYSEArca:DRR). Predictably, those ETFs have been stymied by the euro’s surprise ascent.
“The relative performance of European stocks in USD terms (blue line, left axis) tracks with a 90% correlation moves in the USD/EUR spot rate (red line, right axis). As the euro has risen against the USD so far in 2017 so to have European stocks outperformed global stocks. It follows then that further euro strength should result in further European stock outperformance,” according to ETF Daily News.
For more information on hedged options, visit our currency hedged ETFs category.