While the European crisis is filling the news, many stock investors do not have access to Forex markets. Many brokers such as TD Ameritrade (AMTD) now offer Forex, but some still do not have access to trade spot Forex directly without opening an additional brokerage account. Even so, a direct Euro short may not be the only way to profit from the Eurozone crisis. In a previous article, EES outlined an options play to trade the volatility of the Euro. There are many other alternatives to trade the crisis, here we will explore trading Currency ETFs available on US markets, as well as ETFs that may be greatly impacted by the Eurozone crisis.
What are Currency ETFs
Currency ETFs are ETFs that track Currencies but are offered as an ETF traded on an exchange. They track both individual Currencies and derivatives, such as (UUP) which goes long the US Dollar index.
SA Editors have published a full list of Currency ETFs here. Updated performance information on Currency ETFs can be found here.
The most obvious observation when examining the performance is that the US Dollar has been strong against multiple currencies, with the exception of the Japanese Yen (FXY). In hindsight, the best trade would have been to short a basket of single currency ETFs, such as:
This provides some diversity as individual news events connected to each Currency may affect how much they go down against the US Dollar. However, this is only in hindsight, does that mean it will continue?
The best Currency ETFs to trade
While the obvious case is Euro weakness, there are also factors preventing significant US Dollar strength. Therefore, a simple short of EUR/USD or may not be enough. A basket can be created using existing ETFs and ETNs that provide exposure to multiple scenarios.
Euro Bearish Basket
This trade involves 4 individual trades, thus creating a basket of baskets (the itself is a basket of multiple currencies that affect the dollar). This would be the Forex equivalent of purchasing multiple currencies long against the US Dollar.
The strategy should hold for at least 6 months, because of the fact that the mainstream pro-bailout party won the recent Greek election, is a signal that we may be in for a slow grind down, not a large volatile explosion.
Looking at the Currency ETF data, the best performers are the Brazilian Real (BZF) and Yen - Double Short (YCS), however these are not plays on the Eurozone crisis, although the Brazilian Real is down against the US Dollar, it is due to factors involving the Brazilian situation, not the Eurozone crisis. Another usual suspect of accidental gains in this situation, the Swiss Franc, is now pegged to the Euro, thus providing no change.
Forex Risk Disclosure - Click here to read
The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.