Forex ETFs Weave A Tapestry Of Yellow And Black Gold, And Paper (From The U.S. Treasury)

by: Peter F. Way, CFA

Some folks find excitement in speculating about international intrigue and competition, as expressed in future prices of foreign exchange. Those can be tracked via the ETFs of Currency Shares Australian Dollar Trust (NYSEARCA:FXA), British Pound Sterling (NYSEARCA:FXB), Euro Trust (NYSEARCA:FXE), Japanese Yen Trust (NYSEARCA:FXY), and ProShares UltraShort Yen (NYSEARCA:YCS)

Widely dissimilar involvements with value relationships complicate this topic, pitting them against US government securities and precious metals that are priced in US$. Another commodity with pervasive international presence is oil which from time to time in certain places becomes a pseudo-currency.

About several of these things I have little knowledge. I do, however have the means to bring together the expectations of folks intimately concerned with the topic across these various dimensions, expressed as likely coming ranges of ETF prices (expressed in US$ terms) during the next few weeks to months.

Let's take a look at how the prices of several of these ETFs have behaved over the past two years, to get some perspective. In addition to the FX ETFs, I have added SPDR Gold Shares (NYSEARCA:GLD), Brent Oil in US$ (NYSEARCA:BNO), and the US stock market as tracked by SPDR S&P 500 (NYSEARCA:SPY).


The top yellow line is the leveraged short ETF of Japanese yen, which has a mirror track in darker yellow as one of the poorer ETF forex performers. The other bad actor at the bottom currently, in purple, is gold. Bright blue marks the track of stocks.

We use the self-protective hedging actions of market-makers in specific stocks and ETFs as they put firm capital at risk when providing market liquidity to complete volume (block) transactions. From those actions we infer their expectations of coming prices. Hopefully, they can pull together useful comparisons between these disparate securities.

In the first columns of the table below are price range forecasts, implied from their hedging activity. The numbers of days' available for any forecasts are the right-most column, and the number of forecasts similar to today's Range Indexes are in the preceding numeric column.

The Range Index indicates what percent of the forecast range lies below the current market quote.

The remaining tabular data are records of price actions in the stocks during the next 3 months subsequent to prior days' forecasts with upside-to-downside forecasts at least as attractive to a buyer as the current forecasts.

Historical profitability is based on a sell discipline of hypothetical buys at day after forecast, using forecast price range tops as sell targets, and forced closeouts 3 months after forecast date if target was not achieved earlier. Such data is not a forecast of future profitability, but is indicative of what has happened under prior similar expectations.

Forecasts showing negative low prices are not current (but are most recently available), although the market quotes are the current end-of-day. Caution is urged on historical results based on less than two dozen similar Range Index experiences or shorter than 3-years of all available forecasts (750+ market days).


The table has been ranked by Range Index, within each ETF focus group. The next most important dimension, as emphasized in our recent article, is the win-loss ODDS among the outcomes of prior like forecasts.

It should be apparent that despite the outstanding recent performance trend of YCS, at today's (near mid-range) Range Index level there has been little useful guidance, as measured by subsequent average simple gains or their average annual rates, from these forecasts. Likewise, neither has there been significant prior benefit to FXY in buying at times when it appeared that there was four times as much upside as there was downside. That condition prevailed often, over 400 out of 1200+ days.

We can only come to the conclusion that, no matter how well informed they are, even educated guesses about forex futures by market-makers mainly involved with stocks and commodities are not likely to be of much help. At least at the levels these particular ETFs are being forecast at present.

But that does not rule out their being able to make valuable contributions to the subject when we look at some of the proxy currencies, like crude oil.

The ETF BNO tracks the European market for North Sea "Brent" oil, which is a key supply for Europe's energy needs. While its two-year trend appears to be fairly neutral, its volatility during the period is well appraised by the market-makers. So well that in the infrequent times when they see upsides nearly four times the likely downside, profits are a near-certainty, and at rates providing an annual double of invested capital. This appears to be such a time.

Additional Disclosure: The author has an investment interest in the website which, while not yet open to the public, is in conversion from being a delivery medium of information to institutional investors to a new life of providing similar help to do-it-yourself investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.