Things Are Getting Interesting For This Dollar ETF

Some exchange traded funds are really enjoy the diverging policies of major global central banks. For example, the People’s Bank of China (PBoC) recently delivered more yuan-depressing stimulus and market participants are comfortable wagering the European Central Bank will add to its quantitative easing program in the coming months.

Conversely, those market participants also seem at ease with the fact that the Federal Reserve will finally raise interest rates in December. Recent action in 10-year Treasury yields and the U.S. dollar reflect as much. To this point in Tuesday's session, no exchange traded funds have made all-time highs, but the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU is within pennies of accomplishing that feat.

Actively managed, the WisdomTree Bloomberg U.S. Dollar Bullish Fund has climbed 3.5 percent over the past month and signals from various dollar indexes indicate more upside could be on the way.

“An interesting development in recent weeks is that signals from the ICE U.S. Dollar Index (DXY) and the Bloomberg Dollar Spot Index are pointing toward different conclusions. Unlike BBDXY, DXY remains nearly 2% below its previous peak. As we have argued previously, DXY is, for all intents and purposes, a measure of the yen and the euro. While this concentrated bet led to a strong performance in 2014, when we attempt to assess the standing of the dollar in the global economy (and investor portfolios), it is likely much more intuitive to look not only at the developed world, but emerging markets as well,” said WisdomTree in a note out Tuesday. 

Faltering emerging markets currencies, a prominent currency market theme this year, are important when discussing USDU, because unlike the U.S. Dollar Index, the WisdomTree ETF features short exposure to several major developing world currencies. Mexico, South Korea, China and Brazil and combine for nearly 19 percent of USDU's weight. Throw in an almost 6.4 percent weight to Australia, a country where the currency has been plagued by the erosion of developing world commodities demand, and USDU's emerging markets exposure grows. 

“While the euro and the yen may be poised to fall further on the back of increases in QE, weakness in commodity currencies has been the primary contributor to BBDXY’s relative outperformance. Leading currencies lower was the Brazilian real, which fell by over 16%. Similarly, the Mexican peso and the Australian dollar both declined by 8.1% and 7.2%, respectively. Given that DXY does not have exposure to these currencies, this is the primary driver of performance deviation over the last eight months. Among the majors, zero foreign currencies have appreciated against the U.S. dollar year-to-date,” adds WisdomTree.

The Eurozone and Japan represent a combined 49 percent of USDU's weight.