Ultimate Guide Currency ETF Trading:-
ETFs have opened up the doors to previously hard-to-reach reach corners of the market, including foreign equities, commodities and alternative asset classes. Currency ETFs in particular have seen growing interest among investors and traders alike as they greatly simplify the challenges that are otherwise associated with entering the forex market .
Currency ETFs attempt to replicate the movements of a currency on the foreign exchange market (forex) against the U.S. dollar (USD), or a basket of currencies. This is done by using cash deposits, such as holding euros or Swiss cash for example, or through the use of futures and swaps contracts to achieve a desired exposure .
If you believe the euro, other active global currency or a basket of currencies will rise or fall relative to the USD, currency ETFs provide a way to capitalize on that. When you purchase a currency ETF you’re betting the price of the currency will rise – short-sell it and you’re betting the price will drop. It is a quick way to capitalize on forex moves without opening a separate forex trading account, which has its own rules, regulations, fees/spreads and brokers.
A currency-specific ETF, such as the CurrencyShares Euro Trust (FXE) tracks the euro/USD forex pair. Figure 1 shows how well the ETF has matched the movements of the euro/USD (pink) over an eight-month period.
Figure 1. FXE versus Euro/USD: Daily Chart – Percentage Scale
A currency basket ETF on the other hand, such as the Dreyfus Emerging Currency Fund (CEW), invests in multiple currencies relative to the USD. In this case, the ETF will increase in value if these currencies on average perform better than the USD .
Figure 2 is list of currency-specific exchange-traded-products (ETPs).
Currency ETFs are exposed to frequent opening gaps in price, and ETF traders won’t be able to capture all of the intra-day moves available on the 24-hour forex market. As with any trading vehicle, use stop-loss orders to control downside risk; incorporate limit orders into your trading in attempt to get favorable pricing during peak and off-peak trading times; and take profits using a disciplined technique as currencies can be volatile and change direction quickly.
ETFs have opened up the doors to previously hard-to-reach reach corners of the market, including foreign equities, commodities and alternative asset classes. Currency ETFs in particular have seen growing interest among investors and traders alike as they greatly simplify the challenges that are otherwise associated with entering the forex market .
How Currency ETFs Work
Currency ETFs attempt to replicate the movements of a currency on the foreign exchange market (forex) against the U.S. dollar (USD), or a basket of currencies. This is done by using cash deposits, such as holding euros or Swiss cash for example, or through the use of futures and swaps contracts to achieve a desired exposure .
If you believe the euro, other active global currency or a basket of currencies will rise or fall relative to the USD, currency ETFs provide a way to capitalize on that. When you purchase a currency ETF you’re betting the price of the currency will rise – short-sell it and you’re betting the price will drop. It is a quick way to capitalize on forex moves without opening a separate forex trading account, which has its own rules, regulations, fees/spreads and brokers.
What’s the Difference?
There are two main types of currency ETF products: those that reflect a specific currency versus the USD, and those that reflect a basket of currencies against the USD.A currency-specific ETF, such as the CurrencyShares Euro Trust (FXE) tracks the euro/USD forex pair. Figure 1 shows how well the ETF has matched the movements of the euro/USD (pink) over an eight-month period.
Figure 1. FXE versus Euro/USD: Daily Chart – Percentage Scale
A currency basket ETF on the other hand, such as the Dreyfus Emerging Currency Fund (CEW), invests in multiple currencies relative to the USD. In this case, the ETF will increase in value if these currencies on average perform better than the USD .
Figure 2 is list of currency-specific exchange-traded-products (ETPs).
| Ticker | Currency | Expense Ratio |
|---|---|---|
| FXE | Euro | 0.40% |
| FXY | Japanese Yen | 0.40% |
| FXA | Australian Dollar | 0.40% |
| FXC | Canadian Dollar | 0.40% |
| CYB | Chinese Yuan | 0.45% |
| FXF | Swiss Franc | 0.40% |
| BZF | Brazilian Real | 0.45% |
| FXB | British Pound | 0.40% |
| ICN | Indian Rupee | 0.45% |
| FXS | Swedish Krona | 0.40% |
| FXSG | Singapore Dollar | 0.40% |
Figure 2. Currency-Specific Funds
Figure 3 highlights currency basket ETPs.
Figure 3 highlights currency basket ETPs.
| Ticker | Basket | Expense Ratio | Strategy |
|---|---|---|---|
| UUP | United States Dollar (Bullish) vs. Basket | 0.50% | Buys only USD futures contracts relative to other major currencies (basket). |
| CEW | Emerging Currency | 0.55% | Invests in emerging currency markets |
| DBV | G10 Currency Harvest | 0.81% | Goes long futures in highest G10 interest rate currencies, and short futures in the lowest interest rate currencies |
| CCX | Commodity Currency | 0.55% | Invests in commodity-related currencies |
| ICI | Currency Carry | 0.65% | Invests in high yielding G10 currencies by borrowing in low-yielding G10 currency markets–carry trade. |
| AYT | Asia 8 | 0.89% | Invests in the 8 currency markets of Asia |
| PGD | Asian & Gulf Currency Revaluation | 0.89% | Invests in 5 currencies: Hong Kong, Singapore, Saudi Arabia, United Arab Emirates and China |
The different products
offer varying risk and opportunity levels, and they provide a wide
range of exposure to different currencies. Baskets invest in multiple
currencies, and therefore should theoretically have more price stability
than a currency-specific product, although that doesn’t mean currency
basket products don’t experience volatility – at times these baskets of
currencies can be very volatile if affected by a regional event or news.
One type of product is not better than the other, but each investor
must thoroughly critique what they are seeking, and the risks they can
accept, before deciding which product is the right fit.
Forex 101
The currency markets allow global commerce
to run smoothly, facilitating the transfer of products and services from
one place to another. According to the 2010 Bank for International
Settlement data (the next report is expected in 2013), global foreign
exchange volume is estimated at $3.98 trillion per day, or about $83
trillion per month. Much of this is speculation, as global world product
(GWP)—the global equivalent of GDP—is estimated at $69 -79 trillion per
year. Much of the volume that occurs above the actual trade of goods
and services is speculation, and can cause significant volatility, very
long-term trends and rapid changes in direction .
The
forex market is very sensitive to news releases that may change
people’s view of a currency going forward. Interest rate and Federal
Reserve announcements as well as economic data releases typically have
the largest impact in this regard. Below we highlight some of the major
data/news releases that affect the forex market. In the moments before
and after these announcements hit the market, expect increased
volatility and wider bid-ask spreads in the currency ETFs you are
trading.
Keep in mind that the
news event affecting one currency or country may affect other currencies
as well – even those that are seemingly unrelated. Therefore, news
events such as those discussed in the next section are noteworthy when
released by any major country, and the names of releases may vary by
country. Locate an economic calendar that shows all news and data
reports scheduled for release in each country to stay on top of news
that may affect your currency ETF. Many of these calendars rate the news
events, from high to low, according to the expected market impact.
Major News Events And Impacts
Federal Reserve or Central Bank announcements
News releases from banking committees, financial bodies such as treasuries or reserve banks relating to interest rates or economic outlooks can shift perception and are widely watched and traded.
News releases from banking committees, financial bodies such as treasuries or reserve banks relating to interest rates or economic outlooks can shift perception and are widely watched and traded.
Consumer or Product Price Index (CPI, PPI)
These indexes provide inflation data and therefore provide clues as to interest rate direction, affecting short- and long-term direction in currencies.
These indexes provide inflation data and therefore provide clues as to interest rate direction, affecting short- and long-term direction in currencies.
Gross Domestic Product (GDP)
This is an indicator of how a country is doing economically and therefore provides valuable fundamental data to currency traders.
This is an indicator of how a country is doing economically and therefore provides valuable fundamental data to currency traders.
New and Existing Home Sales, Retail Sales and Unemployment data
All indicators that provide data on the financial condition of consumers within a country’s economy tend to affect how a country is perceived by global and domestic traders.
All indicators that provide data on the financial condition of consumers within a country’s economy tend to affect how a country is perceived by global and domestic traders.
Policymaker Speeches
Talks by people in power, such as heads of state, Federal Reserve(s) or Treasury departments can sway markets based on their bullish or bearish comments.
Talks by people in power, such as heads of state, Federal Reserve(s) or Treasury departments can sway markets based on their bullish or bearish comments.
Manufacturing and Construction Data
Looks at growth or contraction in the manufacturing sector; an indicator of economic health.
Looks at growth or contraction in the manufacturing sector; an indicator of economic health.
Trade Balance, Balance of Payments, Current Account and Debt Levels
Numbers
that reflect economic health, growth or contraction, which have
long-term effects on the demand and supply of a currency.
Geopolitical News
Unscheduled
news events play a significant role in inducing fear or greed in
investors, causing them to dump one currency, rushing into another. This
includes everything from earthquakes to parliamentary elections.
Commodity and Other Market Prices
Commodities
and other financial markets are affected by currency rates, and
currency rates are affected by changes in other markets. Monitor
correlations between asset classes to determine what a drastic change in
the commodity or stock complex may do to currencies, or vice versa.
Currency ETF Trading Tips You Need
ETFs listed on the American markets will be active during the U.S. session, but actual currency trades around the clock, with the most activity occurring during the U.S. and London market hours. Since currency ETFs are thinly traded outside of U.S. market hours, be wary of trading the open and close (U.S hours) as sharp movements can occur to bring the ETF back in line with its NAV (net asset value), or large orders may cause a significant deviation from NAV .Currency ETFs are exposed to frequent opening gaps in price, and ETF traders won’t be able to capture all of the intra-day moves available on the 24-hour forex market. As with any trading vehicle, use stop-loss orders to control downside risk; incorporate limit orders into your trading in attempt to get favorable pricing during peak and off-peak trading times; and take profits using a disciplined technique as currencies can be volatile and change direction quickly.
No comments:
Post a Comment