Trading Currency ETFs

03/20/2019 8:35 am EST


Paul Cretien

Retired Professor of Finance,

Many countries attempt to weaken their currency to make their products more competitive. Paul Cretien describes potential reversion trades in currency ETFs.

Countries that compete economically want their currencies to be competitively priced; that is cheaper in relative terms to the currencies of trader partners to make their exports competitive. Recall that the U.S. dollar Index has been forced up by strong competition from the euro and other currencies. Because the other currencies move inversely in price with the U.S. dollar, when their currencies drop vs. the U.S. Dollar, their products become cheaper vs. products produced in the United States and  U.S. exports become more expensive and less competitive on price.

Nearly all major currency pairs have declined vs. the U.S. Dollar. The chart below shows how the exchange traded funds (ETFs) representing the British pound, Australian dollar, Canadian dollar, Swiss franc and euro have moved vs the U.S. Dollar. Those ETFs include: Invesco CurrencyShares British pound sterling (FXB), Invesco Currency Shares Australian Dollar Trust (FXA), Invesco CurrencyShares Canadian Dollar (FXC), Invesco CurrencyShares Swiss Franc (FXF) and Invesco CurrencyShares Euro (FXE).

Currency Price Changes

As you can see from the chart, the euro and the British pound have declined the most vs. the dollar over the last year. The British dropped mainly due to problems involving its Brexit vote and failure to come up with a clear Brexit plans, whereas the euro retreated due to dovish monetary strategies.

Several currencies are not that competitive. For example, the Canadian dollar remains at a relatively high level although it has followed declines in the prices of the pound from September through March 2019.

It is not a one-way street, as there are many benefits to having a stronger currency. Certainly, U.S. consumers prefer a stronger dollar, which allows them to buy goods and services at a cheaper price. The huge drop in crude oil prices in 2014-15 was only possible due to a strengthening dollar. Often, more sophisticated economies prefer a stronger currency, while those more dependent on international trade prefer a weaker currency.

As the chart shows, the battle continues, suggesting that when one currency gets behind in its attempt to keep up with the decline in its competitors, a short-term reversion trade selling the one currency that has gained vs. another is a possibility. Traders could also use put options to gain from a price decline.

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