The stage has been set, and the central bank bands are about to start playing. In just a couple of weeks, we'll find out precisely what songs both the European Central Bank (ECB) and the Federal Reserve decide to sing when it comes to stimulating their respective region's economies via monetary policy. Whatever tunes the ECB and the Fed play, markets around the globe will surely be moved. This is true for the equity markets, bond markets and commodity markets. It's also particularly true of the currency markets.
In fact, the decisions made, and the policies implemented, particularly by the ECB, will likely have a material impact on the value of the euro versus the U.S. dollar -- and that means investors have the opportunity to position themselves to profit before the official decisions are made.
But just what could be the catalyst that would make the euro so much weaker? Well, consider the op-ed in the German newspaper Die Zeit, where Mario Draghi wrote that in order to preserve the euro and the euro zone, the ECB may have to go beyond standard monetary policy tools and institute "exceptional measures."
The translation here is some form of quantitative easing, or bond buying, or money printing, by the ECB, which is not good for the value of the euro versus the dollar. But it is good for two exchange-traded funds (ETFs) designed to go higher when the value of the euro is heading lower.
#1 ProShares Short Euro ETF
The ProShares Short Euro ETF (NYSE: EUFX) is a fund designed to move in the opposite direction of the spot price of the euro versus the U.S. dollar. So, if the euro falls against the dollar by 2%, then EUFX will theoretically gain 2%.
The fund is new on the scene, having been released in late June. And though the chart here shows the euro versus dollar trade lagging in August, that move has been more profit-taking in the space than anything else. (A chart below of the second ETF to buy here gives us a bit more perspective.)
#2 ProShares UltraShort Euro
Another way to play the money printing by the ECB is with the more aggressive ProShares UltraShort Euro (NYSE: EUO). The fund employs leverage to get twice the inverse performance of the dollar/euro trade. So, if the euro falls versus the dollar by 2%, then theoretically, EUO should rise 4%.
The chart here of EUO allows us to see the trend in the sector and how well it performed from May through July. However, since the dollar's weakness in August, EUO has given up some ground. But the argument here in favor of a lower euro is based on what Wall Street expects the ECB to do as soon as next week, which is to implement some form of new monetary policy that will be euro bearish.
Action to Take --> Buy EUO at the market. Set initial stop-loss at $19.54. Set initial price target at $23.54. Buy EUFX at the market. Set initial stop-loss at $36.81. Set initial price target at $43.53
If you are confident, and I am, that the euro is headed lower to finish out the year, then a good bet is EUFX. If, however, you are supremely confident that the euro is headed much lower, and you can stomach a bit more volatility, then take the leveraged route and go for the big gains in EUO.