Calling Draghi’s Bluff

April 15, 2014

Plenty of ETF options exist when it comes to playing the euro's next move.


Mario Draghi has dropped quite a few hints that the European Central Bank (ECB) may provide additional monetary easing to weaken the euro. Ongoing strength in the currency continues to hinder the ECB's ability to meet its inflation objectives.

Unlike the now-infamous "whatever it takes" comment that brought European debt markets back from the brink of disaster, Draghi's jawboning appears to have had only a minimal, if any, effect on the appreciating euro. Still, the might of the ECB has yet to be fully tested, and the central bank may yet weaken the euro to meet its policy objectives.

Regardless of which direction the euro heads, these are the ETFs to keep an eye on:

  • 1x euro: This is an obvious one, as the ECB has expressed its willingness to intervene to weaken the euro should it continue to appreciate. For those who see further euro-strength as the unlevered ETF play, the CurrencyShares Euro ETF (FXE | A-98) tracks the spot price of the euro relative to the U.S. dollar.
  • 2x euro: For extra octane, investors might consider the ProShares Ultra Euro ETF (ULE), which provides a 2x leveraged return of the euro spot price against the U.S. dollar.
  • 1x (inverse) euro: Investors who believe the euro will depreciate may want to consider the ProShares Short Euro ETF (EUFX), which provides inverse exposure to the daily performance of the dollar price of the euro.
  • 2x (inverse) euro: Investors looking to take a big bet on euro depreciation may be interested in the ProShares UltraShort Euro ETF (EUO), which provides a leveraged, inverse return to the daily performance of the euro spot price against the U.S. dollar.
  • Euro-hedged German equity: Investors who believe the euro may depreciate, but who prefer the inherent earnings capacity of equity investments, may want to consider the db X-trackers MSCI Germany Hedged Equity ETF (DBGR | C-53), which tracks a plain-vanilla index of German stocks but hedges exposure to the euro. As an export powerhouse, Germany stands to gain most from a weakened euro—even if the majority of its exports are to euro-bloc countries. German goods become more competitive in the global market.
  • Sterling-hedged U.K. equity: Should the euro continue to appreciate, the U.K.'s export market may be a prime benefactor: In this scenario, euro-denominated exports would become increasingly expensive relative to their sterling-denominated competition. For this play, investors might consider the WisdomTree United Kingdom Hedged Equity ETF (DXPS | C-44), which tracks a dividend-weighted index of export-oriented U.K. companies.


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