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Will Euro ETFs Stand Steady or Fall Like a 'House of Cards'?

Sanghamitra Saha

Talks about ECB’s QE tapering has been rife for quite some time now, though nothing is official yet. Questions have already been raised over the effectiveness of the central banks’ ultra-easy monetary policies in boosting growth. This in fact led many market watchers to write off expectations of further fat easing from central banks like the ECB.  

In such a scenario, Euro zone inflation – which has been far from the target of 2% --surprised in September. Consumer prices grew 0.4% year over year in the month – the quickest pace of growth since October 2014. The reading followed a 0.2% jump in each of the prior two months and met the preliminary numbers as well as economists’ estimate. Food, rent and tobacco boosted inflation.

Inflation solidified in Germany (0.5% from 0.3% in August), France (0.5% from 0.4% in August) and Itlay (0.1% from negative 0.1%), while the highest rate (1.8%) was noticed in Belgium.

Since oil prices gave signs of hope given the prospect of an output curb deal in the OPEC meeting on November 30 in Vienna, the Euro area inflation may remain steady. After all, extremely subdued oil prices for a prolonged period played a role in dragging down global inflation.

No, tensions pertaining to Euro area inflation have not vanished into thin air. Core inflation which rules out energy, food, alcohol and tobacco was 0.8%, similar to the August reading. Barring only energy, inflation also slowed to 0.8% from 0.9% in August. Still, an improving trend gives cues that the ECB may not ease further and so the currency euro is less likely to depreciate further. And this case opens the door for Euro ETF investing.

There are ETFs like Guggenheim CurrencyShares Euro Trust ETF FXE and Ultra Euro ETF ULE to go long on Euro.

But Will ‘Euro Fall like a House of Cards’?

But there is another side of the coin. We would like to mention that Professor Otmar Issing, the European Central Bank’s first chief economist recently cautioned that the Euro cannot last in its present form. He said “one day, the house of cards will collapse.”

As per Professor Otmar Issing, “it will be a case of muddling through, struggling from one crisis to the next.” He also asserted that only a political union can save the common currency but something of this sort is unlikely to take place. “An exit from quantative easing policy is more and more difficult, as the consequences potentially could be disastrous,” he said, while the falling quality of eligible collateral is a serious issue.

This concern arises further given the fact that the U.S. economy is coming up with decent economic indicators and the Fed is likely to enact a rate hike by this year end. If this happens, euro is expected to lose strength against the greenback (read: Currency ETFs in Focus on Strengthening Dollar).

Plus, the fate of Euro is largely tied to the Brexit process. If a ‘hard Brexit’ occurs in the coming days, the common currency may feel the pinch and slide (read: How to Play the Pound and UK ETFs Now).

Added to this, uncertainty over the referendum on constitutional reform in Italy on December 4 may also cause a crash in the currency euro. If Italy’s prime minister Matteo Renzi loses, the anti-Brussels Five Star Movement is likely to strengthen. The political partyhas been gaining popularity and has called for a referendum over the euro among other steps, as the per the source.

So, if any of the above-mentioned arguments holds good, it is better to short euro. Investors can do that by investing in inverse Euro ETFs like UltraShort Euro ETF EUO, Double Short Euro Index ETF DRR and Short Euro ETF EUFX (see all inverse currency ETFs here).

Technical Angle

The fund FXE has a negative weighted average of 1.80. Since a negative weighted alpha points to more pain, Euro may slip ahead. On the other hand, inverse Euro ETF EUO has a positive weighted alpha of 1.08.

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CRYSHS-EURO TR (FXE): ETF Research Reports
PRO-ULS EURO (EUO): ETF Research Reports
MKT-VEC DB S EU (DRR): ETF Research Reports
PRO-ULT EURO (ULE): ETF Research Reports
PRO-SH EURO (EUFX): ETF Research Reports
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