Currencies get a lot of talk time on news media, as retail speculation in currencies has exploded in the last few years. Currency ETFs allow stock traders an easy way to gain exposure to global markets, diversify risk or simply place speculative trades based on the global events and macro factors shaping economies around the world. Many currencies have a corresponding ETF, although like many of the low liquidity currencies they represent, liquidity can be issued in some of the less popular currencies. The euro, British pound, Swiss franc and Japanese yen - all major currencies along with the U.S. dollar - have currency ETFs, some more heavily traded than others. From a technical trading perspective, we'll examine the outlook of these ETFs.
Rydex Currency Shares Euro (ARCA:FXE) ETF, reflecting the Euro, moved down during the latter part of 2011, but has stabilized and moved higher overall in 2012. There are two major technical factors to be aware of in the Euro ETF - a bull case and a bear case. The pair has been moving higher and the uptrend is confirmed if the price can move above the recent high at $134.60 (preferably on a closing basis). The case can be made that the see-saw price action from February through March 28 is a correction within what will end up being a bull market in the euro. Currencies are never traded in isolation, but relative to another currency or asset. Therefore, as the global market comes to realize that the rest of the world is not without its own problems, the euro may once again become favorable. Bears may argue that the right shoulder of a head and shoulders chart pattern is forming at this moment. This idea is not without merit, but at this point is highly speculative as chart patterns are only confirmed once they complete. A completed head and shoulders pattern would be bearish indeed, indicating a continuation of the larger decline the euro has been in over the last number of years. Such a scenario does not occur unless $129.53 is breached to the downside (preferably on a closing basis). (For related reading, see How To Trade The Head And Shoulders Pattern.)
Rydex Currency Shares British Pound (ARCA:FXB) ETF has some similarities to the Euro ETF as the two currencies are correlated. The British pound ETF has had a more "ranging" tendency though since the middle of 2010; the ETF has stayed between $151.18 and $166.12. The current price is sitting in the middle of that range. Short-term upward pressure has been building though. The chart shows the recent price action, which has been predominantly up in 2012. Through February and March the ETF has been confined to (smaller) range between $158.60 and $154.76. A move above this short-term high signals a move to $162 and a potential test of the longer-term range high near $166. Giving the current ranging nature of the pair, upside false breakouts are a real possibility and would be short-term bearish move. A drop below this short-term range low at $154.76 means the larger range low is likely to be tested near $151.
Rydex Currency Shares Swiss Franc (ARCA:FXF) ETF looks quite similar the Euro ETF chart, as once again these currencies are correlated. The rally in 2012 followed by the expanding up and down moves seen in February and March could be an expanding correction in a longer-term bull market, or once again could be the forming what will eventually be a bearish head-and-shoulders patterns. A rise above $110.49 would confirm the former, while a drop below $105.76 confirms the latter scenario.
Rydex Currency Shares Japanese Yen (ARCA:FXY) ETF has seen a major reversal. The yen, which has been strong for a long time, has reversed course and has been getting weaker against most currencies. The trend down has been aggressive and should not be fought as there are potentially strong long-term forces playing out in the currency. A counter-trend move higher, which occurred in March, provides a level to watch. A rise back above $120 means this upward move is not over, but is unlikely to result in a major correction higher. Rather these jumps in price are more likely shorting opportunities for another wave to the downside. If the recent low at $117.09 is penetrated, that is a bearish and indicates this upward correction is over and further downward momentum is likely. (For additional reading, see Retracement Or Reversal: Know The Difference.)
The Bottom Line
Currency ETFs provide an easy way for investors and traders to gain access to currency exposure without investing directly in the forex market. Many currencies are tradable via ETF but the volume of those ETFs should be looked at before trading to make sure it is appropriate for the trading style being employed. Currency movements are based on large macro factors trends that can take a long time to emerge, but when they do they can be very powerful. There are always trade set-ups occurring in currency markets, and ETFs provide a way to take part in those moves. (For more, see Technical Analysis: Introduction.)
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.
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