So Much To Consider With Dollar ETFs

As has been widely documented, the U.S. dollar is an epic disappointment this year in the currency world, ensuring the same can be said of the PowerShares DB US Dollar Index Bullish Fund UUP among currency exchange-traded funds.

UUP, the ETF proxy for the U.S. Dollar Index, is down more than 8 percent. Making the dollar's slide all the more staggering is that the Federal Reserve has boosted interest rates twice this year with a third rate hike likely before the year ends. The dollar, so says conventional wisdom, usually trades higher in rising rate environments.

UUP tracks the value of the greenback against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. How professional traders currently view the greenback could prove instructive.

“It is prudent to acknowledge the short-term extreme juncture in which the professional community is at regarding the US dollar,” said Rareview Macro founder Neil Azous in a note out Monday. “Right now, they are only setup for a continued linear move, not a 'foxtrot' market (i.e. two steps up, side-step, back-step).”

Euro Issues

Obviously with the dollar sagging, other currencies are surging, including the euro. For example, the CurrencyShares Euro ETF FXE, which tracks the euro against the dollar, is up 10.4 percent year to date. Of course, that is problematic for UUP because nearly 58 percent of that of that ETF measures the dollar against the euro.

The strong euro has not derailed European stocks, at least not yet. Europe ETFs among the best performers this year as batch of those funds are easily outpacing the S&P 500. But this scenario serves as a reminder that investors are taking currency risk when investing in ex-US stocks. Unless an investor buys a currency hedged Europe ETF, bets on traditional Europe equity ETFs are also long bets on the euro against the dollar.

There appears to be some doubt among traders regarding how much gas the euro has left in its tank. FXE is currently among the 15 most shorted U.S.-listed ETFs.

Talking Sentiment

“Regarding sentiment, the new long base in the euro exchange rate, which is now significant, spent the weekend sending around illustrations depicting 'long-term' cycles,” said Azous. “Why? Because to justify a move beyond the current 12% appreciation in the EUR/USD, the narrative must shift into cycles, or something structural, to justify another 10–20% move higher without a major interruption.”

Year to date, investors have pulled $275 million from UUP, a total exceeded by just three other PowerShares ETFs, according to issuer data.

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