Investors Join Traders In 'Perfect Storm' For Currency ETFs

February 28, 2008

Improving fundamental signals combine with soaring technical factors to push broader popularity of new funds.

As Federal Reserve Chairman Ben Bernanke signals that short-term interest rates are going down in the U.S., activity in exchange-traded funds linked to different currencies around the world is spiking.

And that's bringing both short-term speculators as well as long-term ETF investors into the market. The combination of more economists forecasting a prolonged weakening in the greenback and record-high price gains are providing both fundamental and technical analysts with a field day.

The result is something akin to a perfect storm in drawing attention to a rather new form of ETF investing, says Joe Baker, a longtime advisor at Alcus Financial Group in Mt. Pleasant, S.C.

"I've never seen this much interest in currency ETFs before," he said with a laugh. "There's just a pile of money coming into these funds now."

Take the Rydex CurrencyShares Euro Trust (NYSE: FXE). In the past 12 months, FXE's price has jumped 14.5%. Along with that rise, its average daily volume has risen from around 100,000 shares in early September 2007 to more than 400,000 shares now.

"We've got the Fed chairman this week essentially telegraphing to the market that rates are coming down," said Jerry Slusiewicz, president of Pacific Financial Planners in Newport Beach, Calif. "That's driving up prices and sending trading volume up in droves."

He hasn't jumped on the bandwagon yet. Still, Slusiewicz says FXE looks very attractive right now on several different levels. And as midday approached on Thursday, he was inching closer to making a call for some of his clients.

On the technical side, FXE broke what's called a triple-top on price charts. That's a rare occurrence. But since the current run began with the euro in early fall 2007, Slusiewicz says FXE's low point has been about 5.5% of its current high.

"So even if there's a fallback, the short-term downside risk in this current pattern seems pretty attractive at less than 6%," he added.

Slusiewicz uses stop/loss orders with any ETF transactions. For FXE, he's looking at $143.40 per share. "That's the low side of the trading range we've been in since late October of 2007," he said.

Slusiewicz also checks fundamentals before buying an ETF. Those are attractive as well for FXE, he says. With comments made by Bernanke before Congress on Wednesday and Thursday, futures traders are now pricing into the market a 50 basis points rate cut, Slusiewicz says.

That makes the U.S. dollar less attractive globally. "So far, the European Union hasn't cut rates, even though they've talked about it," Slusiewicz said.

Another confirming signal could be that gold keeps soaring since the Fed started cutting short-term rates in September. Slusiewicz also owns StreetTracks Gold Shares (NYSE: GLD). That ETF's price has shot up 45% since early fall.

"So gold traders are expecting the dollar's weakness to continue," said Slusiewicz. "We're seeing a lot of confirming signals coming together right now. And it looks like this could be a long-term trend."

Bruce Zaro, a strategist at Delta Global Advisors Inc., says he's seeing a lot of interest in currency ETFs lately from traders and long-term oriented investors.

"From a technical standpoint, this looks like a good buy for traders," he said. "And given that FXE's dividend yield is around 2.74% right now, which is on par with the broad stock market, that's another real plus."

With Tuesday's breakout, his technical analysis of price charts indicates that FXE could move up to the $160-per-share range later this year. "If that happens, its price appreciation as well as its yield would translate into a gain of 9.33% since Tuesday's breakout," Zaro added.

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