Europe is in trouble and the Euro offers potential opportunities as turbulence on the continent continues.
On September 4, the European Central Bank took another step in addressing the ongoing problem of “disinflation” as the region’s economy continued to deteriorate. On August 29, Eurostat reported that the inflation rate for the Eurozone continued to sink from 0.4 percent in July to 0.3 percent in August. The news raised anticipation that the September 4 meeting of the ECB Governing Council would bring a lowering of the benchmark interest rate to 0.10 percent. Although there was a good deal of speculation about the possibility of a quantitative easing program, similar to the Federal Reserve’s bond-buying program in the United States, the feasibility of such an effort in the Eurozone would be complicated by the fact that Eurobonds were never introduced after the common currency was created.
The core problem causing the persistent threat of deflation in the Eurozone is unwanted euro strength. A stronger euro causes Eurozone exports to be less competitively-priced in foreign markets. Last November, Nomura warned that euro strength could shave as much as 0.5 percent from Eurozone GDP during 2014.
The September 4 meeting of the European Central Bank Governing Council brought a lowering of the benchmark interest rate to 0.05 percent – officially hitting the “lower bound”, from which there will be no further interest rate reductions. After the meeting, ECB President Mario Draghi announced that the central bank would begin purchasing asset-backed securities and covered bonds. Although the ECB’s balance sheet is presently €2 trillion, the purchasing program would boost the balance sheet back to its January 2012 level of €2.7 trillion. Bundesbank President and Governing Council member Jens Weidmann opposed the decision, as Germany has consistently opposed nearly all of the ECB’s monetary intervention efforts. Meanwhile, some commentators complained that the plan for purchasing asset-backed securities and covered bonds would ultimately prove inadequate because nothing short of a quantitative easing program could solve the region’s economic ills.
After Thursday’s ECB decision was announced, the exchange rate for the euro sank to its lowest level since July of 2013 and gained a little on Friday to close at 129.51. Going forward, many investors are expecting to see a continued weakening of the currency, especially when the ECB begins purchasing asset-backed securities and covered bonds. Those who plan to profit from further euro weakness could consider the following ETFs:
ProShares UltraShort Euro ETF (NYSEARCA:EUO): This ETF is the most popular product for shorting the euro and its goal is to deliver -2X (inverse) the daily movement of the Eurodollar.
ProShares Short Euro ETF (NYSEARCA:EUFX): This ETF is potentially less-risky than EUO because it is not leveraged and is built to track -1X the inverse movement of the Euro, but this ETF is very thinly traded and so could be difficult to trade efficiently and effectively.
On the other hand, Euro bulls who believe that the Euro will not weaken any more from its current exchange rate because it has “bottomed” or those who believe that the euro will incur intermittent periods of strength, can consider the following ETFs:
CurrencyShares Euro Trust ETF (NYSEARCA:FXE): This ETF offers a bullish Euro position in relation to U.S. dollars.
ProShares Ultra Euro ETF (NYSEARCA:ULE): This ETF is a bullish Euro ETF which is designed to deliver +2X the daily moves in the Euro, however, it, too, is thinly traded.
Bottom line: The European economy is in trouble and moves by the European Central Bank have taken a toll on the Euro. Should quantitative easing come to pass, more Euro weakness could be seen ahead.