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Trading ERO This Week

by: Simit Patel October 02, 2008 | about stocks: ERO / FXF / UDN    

Simit Patel

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Well, no one can say the market isn't exciting these days. And I'm not just referring to the US market; the action is global.

The Euro fell 2.5% against the US dollar on Tuesday, marking the largest single day decline against the dollar the currency had since its inception. A great day for those who shorted ERO, the ETF that tracks the EURUSD exchange rate.

And that just may be the start. Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo, has said selling the euro is "all but unavoidable."

While I tend to agree, I would note that selling the US dollar is even more unavoidable. With that in mind, I am slightly bullish on ERO over the next six months.

However, I will most likely not be trading it, as I think the EURUSD rise has its best days behind it. Dollar bearishness is practically inevitable in my opinion, though, but I think it is better against other currencies -- namely the Swiss Franc, and its CurrencyShares ETF (FXF).

PowerShares Dollar Index Bear Fund (UDN), though, remains my favorite currency ETF to hold over for a few years. But back to the ERO.

Bank failures and government interventions are driving both the Euro and the US dollar at this point, with Tuesday's big drop in the Euro resulting from speculation that France and Belgium would bailout Dexia SA. Those looking to short ERO may want to consider looking at the spot market for the EURUSD exchange rate.

Below is a chart (click to enlarge); a major trendline is at 1.3850, with the spot market trading at approximately 1.4100 at the time of this writing. The market has been reacting well in the short-term to nationalization/bailout news out of the US, while responding poorly to the same type of news out of the Eurozone.

Should we get bearish news for the ERO and a break below 1.3850 in the spot market, EURUSD might be a very nice short-term short opportunity. Disclosure: No positions

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This article has 5 comments:

  •  
    Oct 02 07:02 AM
    Just a quick correction that ERO is an ETN, not an ETF. My apologies for the error.
    Reply
  •  
    Oct 02 11:24 AM
    No problem but ERO has only 2660 shares traded today.That could be very dangerous with such low volume.
    Reply
  •  
    Oct 02 04:46 PM
    Why not use securities like FXA or DRR to trade the USD/EUR, they're much more liquid. But as to your willingess to short the dollar, I don't think that's wise in the risk-averse environment where Treasuries are king.
    Reply
  •  
    Oct 02 07:17 PM
    @copper1987, very good point. i'm actually trading the spot currency market, was trying to make an ETF/ETN connection for the seekingalpha crowd. FXA or DRR like cjct suggests is probably a better idea.

    @cjct, inflation is going to kill the dollar. treasuries may be king for now, but that is because traders are looking at short-term deflation rather than the undeniable amount of money supply expansion the fed is doing, as well as the growing double deficits and the rising default risk of 10 year US bonds. all of this points to a weaker dollar and difficulty for the US in securing debt, which will lead the fed to print its way out of debt. i am expecting a run on the dollar and a lot of inflation over the next few years.
    Reply
  •  
    Oct 03 02:47 AM
    While I do agree that there's nothing kosher about the Twin Deficits, as currencies are all relative I think that the US will come out of this downturn six months earlier than the eurozone because it entered it six months earlier. As to inflation, I think it's hard to imagine that inflation will be a problem even in an environment where the Fed continues to increase the money supply to fight deleveraging by ever financial institution. Deflation is likely to win out as the de-leveraging process continues to play out. As we can see by the recent liquidity injections, the Fed cannot add enough money to the system to prevent widespread asset deflation. Due to the characteristics of the fractional-reserve system, risk-aversion (deleveraging) can offset the central banks attempts to inflate our way out of this problem.
    Reply
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