Currency ETFs Forecast More Trouble In The Works

 

The motion picture, “Contagion,” tracks the movement of a lethal virus that kills millions in a matter of days. Will the worldwide community come up with a cure? Or will the pandemic spread, annihilating every creature in its path?

I don’t know the answer… I haven’t seen the movie. In fact, I don’t even plan to see the film because I feel like I’ve seen it before.

Perhaps ironically, many are asking if the poisonous sovereign debt of the PIGS (Portugal, Italy, Greece, Spain) will cause a global meltdown in equities… the same way that toxic subprime mortgages did. For all the nay-saying, it seems that the stock markets won’t relax until Europe comes up with a credible TARP program to bolster the European banks… the same way U.S. TARP supported U.S. banks.

In spite of a 3-day stock rally where the S&P 500 is once again testing the psychological resistance level of 1200, the European credit crunch that I’ve been writing about for months is getting worse. (See August’s, “Without Bailing Out European Banks, These ETFs May Be Toxic.“)

Indeed, 3-Month LIBOR rates climbed above a long-term moving average in mid-August… and they just keep climbing. In fact, it is 40% more expensive for European banks to borrow from one another than it was on the 4th of July.

 

Some folks may like to believe that the “Euro-mess” can be contained within its borders. After all, the S&P 500 is only down -5.6% year-to-date. Hardly a catastrophe, right?

Unfortunately, Currency ETFs are telling a different story. Whereas the euro-dollar has been weak for months, the “contagion” appears to be spreading to emerging-market currencies. Investors are fleeing local safe havens for more traditional ones… like the greenback, the yen, and U.S. treasury bonds.

Asian currencies, for example, held particular appeal, when the world seemed down on the buck. Now that the fears are intensifying, the world’s reserve currency is regaining its “almighty” namesake.

Over the previous month, the U.S. dollar and U.S. stocks show greater relative strength than the emerging markets or their currencies. Unfortunately, this isn’t a sign of success; rather, we’re likely to see even more trouble ahead.

1 Month Performance For Popular Currency ETFs
						Approx 1-Mo %
PowerShares DB Dollar Bullish (UUP)						1.7%
CurrencyShares Yen Trust (FXY)						0.8%
CurrencyShares Canadian Dollar (FXC)						-1.1%
CurrencyShares Australian Dollar (FXA)						-2.0%
CurrencyShares British Pund (FXB)						-3.7%
WisdomTress South African Rand (SZR)						-4.5%
CurrencyShares Euro (FXE)						-4.8%
CurrencyShares Russian Ruble (XRU)						-5.0%
WisdomTree Indian Rupee (ICN)						-5.4%
WisdomTree Brazilian Real (BZF)						-7.7%
CurrencyShares Swiss Franc (FXF)						-10.3%