The global risk-off environment and improving conditions in the Eurozone are contributing to a jump in the euro currency and related exchange traded fund.
The CurrencyShares Euro Currency Trust (FXE) rose 1.2% Monday and is coming up against its short-term, 50-day moving average. FXE has gained 1.2% over the past week but still remains 9.6% lower year-to-date.
Improving economic conditions are strengthening the outlook for the euro currency. The Ifo index, a widely monitored gauge of economic health in Germany, rose unexpectedly to 108 points for July from 107.5 in June, the Associated Press reports.
“The recent easing of the Greece situation contributed to stronger sentiment in the German economy,” the institute’s president, Hans-Werner Sinn, said.
Supporting the German economy – the largest in the Eurozone, low unemployment and greater domestic demand have grown while other states struggled.
Moreover, the euro currency may also be appreciating on the current risk-off sentiment, triggered by a plunge in Chinese equities Monday. Sam Lynton-Brown at BNP Paribas argues that the currency has recently tended to rise during times of market stress, the Wall Street Journal reports.
In periods of relative calm, rock-bottom European Central Bank interest rates allow investors to borrow euros cheaply to fund riskier bets, notably in emerging markets. However, as risk spikes, the same investors would back off the foreign markets and buyback euros to pay down borrowings.
“If you truly think that the euro has become a funding currency, then it will do this in ‘risk off’ periods,” Anezka Christovova, a currencies analyst at Credit Suisse, said in a Financial Times article.
On the other hand, if the risks dissipate, Eurozone investors may go right back to borrowing on low rates to fuel riskier foreign bets, which would further depreciate the EUR.
Consequently, more aggressive currency traders can capitalize on the turn in the European euro through inverse ETF options. For instance, the ProShares Short Euro (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 (EUO) provides 200% of the inverse return of the U.S. dollar price of the euro on a daily basis. Additionally, the Market Vectors Double Short Euro ETN (DRR) tracks the Double Short Euro Index, which also provides a -200% exposure to the euro.
CurrencyShares Euro Currency Trust
For more information on the EUR currency, visit our euro category.
Max Chen contributed to this article.
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.