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Is a Trend Developing in the Euro?

|Includes: EUO, CurrencyShares Euro Trust ETF (FXE)

The Financial Times put out an article today about year-end record bets against the Euro currency:

"The number of short positions in the euro – where investors benefit from a decline in prices – outweighed long positions by a record 127,900 contracts by December 27, up from 113,700 contracts the previous week."
This data comes from the Commitment of Traders Report produced by the CFTC, and only reflects exchange-traded futures contracts on the Euro, not positions held through the spot foreign exchange market. Nonetheless, many hedge funds and investment firms use futures contracts as a vehicle for speculation and trading so these short positions can serve as a proxy for where the speculative money resides.

With the Euro trading down 3.6% in the month of December it is no surprise that speculative traders are on the short side of the Euro market. However, the investment industry cannot help but debate the fate of the currency, according to the article: "... analysts still differ markedly on the euro’s direction, highlighting the dangers of shorting the currency."

Just remember one important point in trading. We (i.e., traders, investors, etc.) are not in the markets to be "right"; we are in the markets to make money. Babe Ruth was only right 34% of the time (he had a .342 career batting average) yet he was one of the greatest sluggers of all-time. Perhaps the current trend in the Euro will fall apart, or perhaps it will continue. The point is not to predict where the Euro will go, rather react to where the Euro indeed goes!

"That's great! But what if I don't trade futures or the spot FX market, or don't yet know how to", you say?

In this case, there a few exchange-traded fund (ETF) vehicles you can use to trade the Euro currency. The CurrencyShares Euro Trust ETF (FXE) is one of the best ETFs to get long exposure to the Euro, especially since it has a relatively low expense ratio of 0.40%. For short exposure, if I had to use an ETF I would use the ProShares UltraShort Euro ETF (NYSEARCA:EUO). However, EUO is a leveraged ETF and you need to be aware of, and educate yourself on, the specific additional risks associated with trading leveraged ETFs, such as ETF decay and typically higher expense ratios.

Disclosure: I have a short position in the Euro futures market. I do not have any positions in Euro ETFs.