Mordy: Position Now For A Weaker Euro

April 21, 2014

It sure looks possible that the ECB could be about to launch into its own QE.

Personal conversions often mark dramatic turning points in history. In the 4th century AD, Roman Emperor "Constantine the Great" was convinced that divine intervention was needed before a critical battle.

According to one account, while he was praying, a flaming cross appeared in the sky bearing the words, "In this sign thou shalt conquer." Constantine was indeed victorious the next day, which ultimately changed the course of Western civilization, as he immediately commanded official toleration of Christianity and other religions.

The world of finance also has its momentous conversions. This time the subject is the European Central Bank (ECB).

Historically, the ECB has been a temple of monetary prudence. The most recent example is its resistance to partake in the policy du jour; namely, quantitative easing (QE). Germany's Bundesbank—the EU's most influential national central bank—has been particularly vocal, condemning large-scale asset purchases as "illegal and unconstitutional."

To understand the depth of this conviction, one only need look back to Germany's history in the 20th century. In the early 1920s, the country had a horrific hyperinflationary episode. Then, after total economic destruction following the World War II, Germany's currency at the time—the reichsmark—was virtually worthless.

Fear of similar episodes is now embedded in the national spirit. As an example, a recent poll found that Germans fear inflation more than getting cancer.

All of this may be changing now. In a dramatic softening of his stance, Bundesbank President Jens Weidmann recently said that quantitative easing in the eurozone is "not out of the question."

That's an enormous policy change and likely the first step toward easier monetary policy and, ultimately, a weaker euro.

Before we outline the important points, consider the number of ETFs that supply exposure to European assets that hedge out the currency risk or short the euro:

ETF Name Symbol Issuer Expense Ratio AUM
Barclays ETN+ FI Enhanced Europe 50 ETN FEEU Barclays Capital 1.00% $1,068,435,550
iShares Currency Hedged MSCI Germany HEWG BlackRock 0.53% $2,382,000
Credit Suisse FI Enhanced Europe 50 ETN FIEU Credit Suisse 0.80% $146,823,020
db X-trackers MSCI Europe Hedged Equity DBEU Deutsche Bank 0.45% $13,108,447
db X-trackers MSCI Germany Hedged Equity DBGR Deutsche Bank 0.45% $41,282,817
BLDRS Europe Select ADR ADRU Invesco PowerShares 0.30% $18,512,890
ProShares Short Euro EUFX ProShares 0.95% $7,077,820
ProShares UltraShort Euro EUO ProShares 0.93% $407,654,625
Market Vectors Double Short Euro ETN DRR Van Eck 0.65% $82,188,900
WisdomTree Europe Hedged Equity HEDJ WisdomTree 0.58% $1,098,111,495
WisdomTree Germany Hedged Equity DXGE WisdomTree 0.48% $9,213,369
....
 

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