The euro currency and related exchange traded funds retreated as a political upheaval in Italy fuels concerns that the third-largest Eurozone member could pull out from the currency bloc.
The CurrencyShares Euro Currency Trust (NYSEArca: FXE) fell 1.1% Tuesday with the euro currency now trading around $1.1542, its lowest level in six months.
“There’s an existential threat hanging over the single currency if we head into more elections this summer, I don’t know how we get away from that now, given the scale of the financial implications,” Kit Juckes, chief foreign exchange strategist at Société Générale, told the Wall Street Journal.
The sudden spike in uncertainty may be traced back to Italian President Sergio Mattarella’s decision to block the formation of a euroskeptic coalition government formed of the anti-establishment 5 Star Movement and the League parties, fueling concerns of a new elections, which could strengthen anti-euro zone forces.
Eurozone’s Existential Crisis
“The market response of pushing the euro lower appears justified, as this story is shaping up to be one more existential threat for the eurozone. In the event of early elections, euroskeptic and populist parties could gain an even bigger share of the voting pie, increasing the risk that policies like calling a referendum on the euro start being discussed again in eurozone’s third-largest economy,” said Andreas Georgiou, investment analyst at XM.com, according to MarketWatch.
“As for the euro, while its longer-term outlook remains relatively bright, the currency’s near-term prospects continue to be clouded by a combination of political uncertainties, a European economy losing momentum, and an ECB that appears increasingly more cautious to normalize,” Georgiou added.
Alternatively, ETF traders could also capitalize on further euro currency woes through inverse or bearish euro-related ETFs. 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. The Market Vectors Double Short Euro ETN (NYSEArca: DRR) tracks the Double Short Euro Index, which also provides a -200% exposure to the euro. The VelocityShares Daily 4X Long USD vs. EUR (NYSEArca: DEUR) takes 4x or 400% exposure to the moves of the U.S. dollar against the euro currency. Consequently, these types of inverse ETFs may be used to capitalize on a stronger USD or weakening EUR.
For more information on the foreign exchange markets, visit our currency ETFs category.