The euro and currency-related ETFs have slipped to multi-year lows and face many headwinds that threaten to push this market lower.
The Invesco CurrencyShares Euro Currency Trust (NYSEArca: FXE) declined 4.9% year-to-date to its lowest level since early 2017, with the euro now trading at $1.0967.
Weighing on the euro currency, the Eurozone’s deeply negative rates, expectations of further easing out of the European Central Bank, ongoing global trade war and relatively high-yield U.S. assets have all taken their toll, the Wall Street Journal reports.
Salman Ahmed, chief investment strategist at Lombard Odier IM, warned of the possibility of the exchange rate reaching $1 to the euro, or parity, especially if Eurozone governments fail to raise spending to counteract the slowdown since the ECB has less room to ease.
“The fact that the ECB can’t lower rates from here means they can’t support the economy,” Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, told the WSJ.
“If fiscal policy doesn’t come to the fore [in Europe]then parity is a credible forecast: A recession would put much more pressure on monetary policy to be more aggressive,” Ahmed told the WSJ.
While a weak euro could help the Eurozone’s export industry stay competitive on the global arena, the emergence of new trade barriers and anti-trade sentiment continue to weigh on these segments.
“If you’re an exporting nation and your currency drops that is helpful but exports are also linked to the global trade backdrop,” Caroline Simmons, deputy head of UBS Wealth Management’s U.K. investment office, told the WSJ.
Trump on U.S. dollar against a weak euro
Furthermore, President Donald Trump who has already shown displeasure at the relative strength of the U.S. dollar against a weak euro could enact aggressive measures to limit Eurozone trade if the Federal Reserve doesn’t step up to depreciate the greenback.
“Further weakness in the euro, for whatever reason, may annoy and aggravate the POTUS who already thinks the Europeans are nearly as bad as the Chinese with their FX policies,” Neil Dwane, global strategist at Allianz Global Investors, told the WSJ.
ETF traders who are wary of the euro currency’s outlook could also capitalize on further 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 VanEck 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.
For more information on the foreign exchange markets, visit our currency ETFs category.