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Is The Worst Over For Euro ETFs? - ETF News And Commentary

Sweta Killa

After a freefall over the past one year due to a stronger greenback, a positive momentum for the euro has started to build up in recent weeks. This is especially true, as euro has rebounded over 7% against the greenback from its 12-year low of $1.05 touched in March.

In fact, the second-most traded currency in the world saw its biggest monthly gain of 4.6% in April since September 2010, according to Bloomberg. In the ETF world, the two euro products – CurrencyShares Euro Trust (FXE) and iPath EUR/USD Exchange Rate ETN (ERO) – gained 4.3% and 5.5%, respectively, in the last one-month period.

The rally might erode the market expectation that euro could soon hit parity with the U.S. dollar. But is the bullish trend sustainable (read: Bet on Euro-Dollar Parity with These ETFs)?

Behind The Surge

A surge in the common currency against the greenback was brought about by a few key factors. First, the Euro zone economy is lately showing signs of improvement buoyed by dual strength of ultra-easy monetary policies and exports. Rising business activity, easing four months of deflation and improving consumer confidence are fueling growth in the economy, leaving the region to enjoy the brightest spring in several years.

In addition, this week, the European Commission (EU) raised its outlook for Euro zone economic growth to 1.5% from 1.3% for this year. All these have resulted in euro short-sellers locking in profits at the current level and a subsequent rise in the currency. Further, rising bond yields across Europe in recent sessions, in particular German Bunds, has raised the appeal for the euro (read: 3 European ETFs Leading the Market Higher).

Apart from these, weak U.S. corporate earnings and a string of disappointing economic data softened sentiments triggering a broad sell-off in the U.S. dollar, helping euro to climb back. Beaten by a brutal winter, slumping exports and sharp cutbacks in oil and gas drilling, the U.S. economy almost came to a halt in the first quarter with a meager 0.2% growth. The nation’s trade deficit widened 43.1% in March reflecting the biggest shortfall in more than six years. This has led to concerns over the slowdown in the U.S. economy.

Further, the Fed downgraded its outlook for the labor market and economy in its latest policy meeting. The central bank will wait for more months before raising the first interest rates since 2006. Last month, the International Monetary Fund (IMF) also cut its U.S. growth forecast for this year and the next to 3.1% each from the previous expectation of 3.6% and 3.3%, respectively (read: ETFs in Focus Post Fed Meet).

A Major Threat

Reemergence of the Greece debt crisis has been the major risk to the surging euro that could again push the currency and the ETFs into a deep trouble.

Euro ETFs in Focus

FXE tracks the movement of the euro relative to the U.S. dollar, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited euros. It has amassed $384.9 million in its asset base and trades in a solid volume of more than 935,000 shares a day. The product has an expense ratio of 0.40%.

ERO is an ETN option and seeks to match the performance and yield of the EUR/USD exchange rate. It not only provides a core investment opportunity in the currency space but also enables investors holding a well-diversified portfolio to hedge their position against foreign exchange fluctuation. Still, the product has failed to attract investors with just $3.2 million in AUM and less than 1,000 shares in average daily volume. It also charges 40 bps in annual fees from investors.

Investor should note that both products have a long-term Zacks ETF Rank of 4 or ‘Sell’ rating, indicating that some pain might be in store. But a near-term trend reversal suggests that these have a potential to move higher in the coming days if the current trends persists (see: all the Currency ETFs here).

Technical Look

To get more idea about the expected movement of these funds, look at the technical chart:


The above chart for FXE shows that it has recently broken its near-term range and its near-term moving average (9-Day EMA) has managed to go above the short-term average (50-Day EMA), reflecting some optimism for this ETF. This is further confirmed by an upswing in Parabolic SAR, although this figure should definitely be monitored closely.

However, the near-term moving average is far away from the long-term average (200-Day EMA) and the Relative Strength Index (RSI) is around 70.38, suggesting that the ETF is near its overbought territory. To sum up, the fund could witness some more upside in the near term but this might not continue for long.


Similarly, the price chart for ERO also exhibits somewhat similar characteristics with near-term moving average being higher than the short term and lower than the long term with RSI of 69.94.

In Conclusion

Investors having a strong stomach and patience for extreme volatility could get into these funds to take advantage of the trend reversal in the near term. But long term outlook remains bleak.

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CRYSHS-EURO TR (FXE): ETF Research Reports
IPATH-EUR/US EX (ERO): ETF Research Reports
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