Thursday’s ETF To Watch: CurrencyShares Euro Trust (FXE)

by on September 8, 2011 | ETFs Mentioned:

Thanks to the Swiss National Bank’s historic decision to peg the franc to the euro by buying foreign currencies in ‘unlimited amounts’ , investors have once again turned their focus to the euro zone and the many troubles that the regional currency is facing. Nations such as Italy are quickly racing to institute more austerity measures while countries such as Greece face bond yields at astronomical amounts, suggesting a resolution to the crisis is coming one way or another before too long. In light of this, the recent moves by the ECB to raise rates to their current level at 1.5% seem unwarranted, especially given that Germany’s economy has weakened significantly over the past few months. As a result, many investors will look to today’s meeting by the ECB in Frankfurt to help set the record straight on monetary policy across the Continent heading into the fall.

At the ECB meeting, pretty much every analyst expects the central bank to keep rates steady at their current level. Price concerns may have decreased in some economies and the deflationary pressure brought about by slumping asset prices could have cooled some inflation worries in the near term. In fact, the ECB is expected to cut growth rates for both this year and the next, so a slashed inflation outlook isn’t entirely out of the question either.

With that being said, this marks a rapid shift in sentiment from just a month ago when a rate hike seemed to be just months away for the important bank. According to some analysts, the talk of nipping inflation “seemed meant to prepare us all for a 25 basis point hike in October,” said Erik F. Nielsen, global chief economist at UniCredit Bank in London. “However, the subsequent intensification of financial tensions and faltering growth momentum call for a significant change in rhetoric at this week’s meeting.” As a result, inflation expectations are likely to dominate the meeting and the outlook for the euro in the short term. This is especially true considering that, unlike the Fed, the ECB just has a single mandate to keep prices steady as opposed to the Fed’s dual mandate of full employment and price stability [see all the ETFs in the Europe Equities ETFdb Category].

Thanks to this key event, investors should look for the Rydex CurrencyShares Euro Trust (FXE) to be in focus throughout the day. The fund tracks the EUR/USD exchange rate, measuring the relative value of two currencies, the euro and the U.S. dollar. The product trades on robust volume of nearly two million shares a day and has AUM of nearly $261 million, suggesting that tight bid ask spreads are likely to greet even the largest of traders [see more fundamentals of FXE here].

Despite these solid levels of interest, FXE has been slumping as of late as the fund has lost close to 3.2% in the past week and nearly 4.6% in the past quarter. However, from a longer term perspective the product has performed much better as FXE is up close to 4.8% year-to-date and has gained nearly 8.6% in the past 52 weeks. Should Trichet manage to do the impossible and soothe investors’ fears over the health of the euro zone and especially highly indebted members such as Greece, FXE could surge on the day. If, however, the ECB appears to be loosening its stance in terms of inflation in order to keep economies afloat, investors could see this popular Rydex product resume its recent downtrend and end Thursday trading sharply lower [see charts of FXE here]. 

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Disclosure: No positions at time of writing, photo is courtesy of Eric Chan.