Believe It: Currency ETFs Offer Upside
At the very least, downside appears limited for the CurrencyShares Euro Currency Trust (NYSEArca: FXE ) . After being one of the worst-performing developed market currency exchange traded funds over the past two years, FXE is roaring back with a year-to-date gain of nearly 4%.
The combination of the weaker U.S. dollar and global investors’ tepid reaction to monetary easing efforts by the European Central Bank (ECB) are among the catalysts boosting FXE.
Coming into this year, some market observers predicted the euro would not weaken against the U.S. dollar as much as was seen in the previous two years. The U.S. dollar has previously been strengthening on the prospect of a tighter monetary policy, which would help remove some of the excess liquidity sloshing around in the economy.
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Now, some major banks are adjusting previously bearish euro forecasts as the common currency remains solid and the dollar continues floundering.
Goldman Sachs “joined Deutsche Bank AG this week in scrapping forecasts for the common currency to slump to $1 or below in 2016, citing changed outlooks for central-bank policy. Goldman Sachs sees the euro trading at $1.05 in 12 months, up from 95 cents forecast previously, analysts led by Robin Brooks, the bank’s chief currency strategist, wrote in a note on Friday. A day earlier, Deutsche Bank, the world’s second biggest currency trader according to Euromoney magazine, raised its year-end prediction to $1.05 from $1,” according to Bloomberg.
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ECB President Mario Draghi has previously signaled that the ECB could expand its quantitative-easing program to bolster growth and bring inflation back up, stating that the return of inflation to target is more important than the impact of ultra-low rates.
Obviously, the dollar and the PowerShares DB U.S. Dollar Index Bullish Fund (UUP) , which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, are key to the euro’s fortunes.
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Looking ahead, Goldman projects the USD will appreciate 15% over the next two years as U.S. monetary policy normalizes.
Goldman analysts also pointed out that traders are increasingly looking to overseas central banks to gauge the dollar outlook. For instance, the European Central Bank and Bank of Japan have played a large role in the USD’s recent weakness.
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“Strategists and investors are scrambling to revise their expectations for the euro after another round of easing from the European Central Bank failed to drive the common currency lower. It has advanced 4.1 percent since Dec. 31, confounding more than 80 percent of analysts surveyed at the time who expected weakness in the first half of the year. Then, 14 banks saw the European currency slumping to parity or below with the dollar by the end of 2016. Now just five hold that view, Bloomberg data show,” according to Bloomberg.
For more news on Currency ETFs, visit our Currency-Hedged category . CurrencyShares Euro Currency Trust
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.
