Volatility is at multi-year lows for the Euro, yet the EUR/USD--and by extension the CurrencyShares Euro Trust (ARCA:FXE)--is very close to a major breakout point, as is the Yen. The Canadian and Australian dollars are seeing an uptick in volatility, compared to a year ago, and have also begun significant and potentially long-term trends. Currency trusts provide a way for non-forex traders to participate in these moves, in an asset that trades like a stock.
Currency Shares Euro Trust attempted to take out a former high at $137.87 last week, but failed, and since then the Euro has seen steady declining. The Euro has been in a narrowing range since November, and a breakout of that range is likely to result in heightened volatility, and potentially a new trend. A drop below $135 breaks the narrowing range and the April low ($135.02), providing an initial target of $132.50 and a longer-term target of $130. The longer-term trend remains up until that break lower occurs. While less likely, a rally above $137.87 signals another primary advance, with targets at $141 and $143.
While still in a long-term downtrend, the CurrencyShares Australian Dollar (ARCA:FXA) has had a strong run higher in 2014. Since mid-January the Australian dollar has been channeling higher. The channel provides support at $92.75; a breach of that level and May low at $92.19 warns this uptrend is over and the price could fall back toward $88. The channel top is near $96 - the current target for this wave higher. Over the longer-term, if the price climbs above $97.41, the secular bear market will be over.
The CurrencyShares Canadian Dollar (ARCA:FXC) has been moving lower for more than three years. The selling increased in late 2013 and early 2014, but the price has stabilized and edged higher in March through May. The short-term trend is up, and could challenge resistance (former support) at $93. If the price climbs beyond $94 there is little resistance until $96. The long-term trend is down though, and the trendline intersects below $94, therefore rallies to that area present selling opportunities. A drop back below $90 in the short-term will induce selling pressure toward the March low at $88.20. The March low giving way ushers in another primary down wave in the multi-year downtrend.
The CurrencyShares Japanese Yen (ARCA:FXY) is moving in choppy range since February. While there is no indication of a breakout yet, the move is likely to be large when the break does occur. Short-term traders can focus on the short-term triangle break. A drop below $95 should see the price fall to just above $94. A rally above $96.15 is an early sign of a longer-term upside breakout. Longer-term, a rally above $96.97 (2014 high) could bolster the price to $100 while a descent below $93.70 will test support at $92.75, and likely continue to move lower with the long-term downtrend.
The Bottom Line
Currency trusts provide a way to access the foreign exchange market in a manner that is familiar to stock traders. The foreign exchange market is open 24-hours during the week though, so when the stock market opens in the U.S. gaps in price are common. Factor this into your risk tolerance, as stops may be triggered at different levels than expected. Stops still help control risk and should be used. If unfamiliar with how currencies and currency trusts move, and their potential volatility, start with small trades and work up to your standard trade size once comfortable.