Overbought/Oversold Currency ETFs

Hickey and Walters (Bespoke) submit: We have already highlighted lists of commodity and dividend ETFs, and today we highlight ETFs that track various currencies. These are great for individuals who want to add currency exposure into their portfolios.

Some of the more interesting ones are UDN, UUP and DBV. UDN is designed to replicate being short the US Dollar against the Euro, Yen, Pound, Canadian Dollar, Swedish Krona and Swiss Franc. UUP replicates being long the US Dollar. DBV tracks the Deutsche Bank G10 Currency Future Harvest Index which goes long currency futures with high yielding interest rates and goes short currency futures with low yielding interest rates.

One piece of info that might be useful is that currency analysts are looking for a long-term fall in the Euro and rise in the Yen versus the US Dollar.

click to enlarge

Comments

[Michael Bom...:]

Not sure if you saw my post (and another's) on the commodity thread, but how are these determined to be under/over/par? Depending on what time scale you look at these currencies, I can see arguments for both under- and overvalued (e.g. cumulative difference between USDJPY and FXY returns over past 5 days or past 60?) Most of the worthwhile arbitrage on these currency ETFs has been due to the same expectations as FX but drastically different liquidities (i.e. rate expectation moves illiquid ETF twice as much as actual exchange rate) in my experience.

2007 May 11 12:28 PM

[Frank Li:]

I'm also interested in how you define over bought or over sold. The discrepancy between ETF price and the currency exchange rate that Michael comments on above can't be sustained over time, because these are ETFs, so an institution can come in and arbitrage the difference at any time (in contrast to a closed end fund).

2007 May 13 11:26 PM