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Inverse ETFs to Hedge Against Further Euro Weakness


Currency traders are growing more pessimistic on the euro as the European Central Bank tries to prop up a slowing economy. Exchange traded fund traders can also hedge against further weakness in the euro with inverse fund options.

The CurrencyShares Euro Currency Trust (FXE) decreased 12.4% over the past year.

The euro currency has depreciated to $1.2004 Friday, touching a four-year low, compared to about $1.38 at the start of 2014.

Currency traders can capitalize on the continued decline 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.

Over the past year, EUFX rose 12.3%, EUO jumped 26.7% and DRR surged 29.4%.

Strategists argue that the euro currency will continue to slip in 2015 as the ECB is ready to enact further stimulus measures to prop up a flailing economy, reports David Goodman for Bloomberg.

Specifically, ECB President Mario Draghi is trying to bolster the economy and stave off deflationary pressures, which supported expectations that the policy makers could enact a bond purchasing program of its own. [2015 Could Be a Good Year for Europe ETFs]

“The euro-bearish consensus was struggling hard for the first half of the year, but it has come good as the ECB has driven rates down,” Kit Juckes, a global strategist at Societe General SA, said in the Bloomberg article.. “The best thing the ECB can try to engineer is still a weaker euro.”

For example, Draghi has stated that the ECB is ready to add as much as 1 trillion euros to the institution’s balance sheets, purchasing everything except gold, which means the central bank will be dumping euros to acquire assets and devaluing the currency.

Now, options traders are paying more than any time in over a year to hedge against further euro declines. The premium for one-year options to sell the euro over those to purchase it is 155 basis points and briefly widened to 159.5 basis points on Dec. 18, the most since Oct. 2013.

“Looking into 2015, I think we will move towards a level that does reflect the situation in the economy and monetary policy,” Simon Derrick, chief currency strategist at Bank of New York Mellon Corp., said in the article. “$1.10 seems about right for next year. The opening few weeks of the year will be a time to be cautious, but on the whole, do I think the euro goes down? Yes, absolutely.”

ProShares Short Euro


For more information on the euro 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.