Friday’s ETF To Watch: U.S. Dollar ETF (UUP)

by on August 6, 2010 | ETFs Mentioned:

A surging stock market and relatively strong earnings has given many investors reason to be bullish on a U.S. recovery heading into the fall. Yet job growth remains anemic with millions of Americans still unemployed and consumer spending still at low levels. This uncertain economic picture was further clouded by conflicting data in regards to employment which is proving to be a key issue in holding back the turnaround.

Earlier this week, two reports came out on the unemployment situation each offering a different view of the economic picture. Wednesday’s ADP private employment report showed that the private sector created 89,000 jobs in June and predicted that the country gained roughly 42,000 jobs in July as well. This news was balanced out by Thursday’s Labor Department report on first time unemployment benefits which surged to 479,000 claims, up from 460,000 the week before and sharply higher than the dip to 455,000 which was forecast [also see Five ETFs For A Double Dip Recession].

With conflicted data on the employment front, today’s unemployment report will look to break the bullish/bearish tie heading into the second week of August. The Labor Department is expected to say private employers hired 90,000 workers in July, up slightly from the 83,000 hired in June. But because of government layoffs tied to cutting temporary census jobs, the unemployment rate is expected to rise to 9.6 percent from 9.5 percent. Should unemployment levels rise more than expected, it would signal increasing weakness in the American economy which would likely cause a sell-off in U.S. dollars as investors flee the currency for safer markets abroad [also read Five Funds For Riding Out The Storm].

Due to this report’s role as a barometer of the strength of a U.S. recovery, we look for the PowerShares DB USD Index Bullish (UUP) to be in focus throughout today’s trading. The fund tracks the Deutsche Bank Long US Dollar Index (USDX) Futures Index which is a rules-based index composed solely of long USDX futures contracts. The USDX futures contract is designed to replicate the performance of being long the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc [see more on the fund's fact sheet]. The fund is by far the most liquid and widely-held fund in the Currency ETFdb Category with close to four million shares in daily volume and almost $900 million in assets under management. UUP is heavily weighted in contracts that bet against the euro (57.6%), yen (13.6%), and British pound (11.9%) and maintains a beta of -0.28 against the S&P 500 suggesting that, for the most part, U.S. equities and the dollar are relatively uncorrelated with each other making the fund an excellent diversification option for investors who are fearful ahead of today’s jobs report. The PowerShares fund is down 3.9% over the past month and could sink even further if the employment report is especially weak [see Top Performing Currency ETFs From The First Half Of The Year].

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Disclosure: No positions at time of writing.