Since the beginning of September, when the Swiss announced their peg to the euro, the CurrencyShares Swiss Franc Trust ETF (NYSE: FXF) has lost nearly -9% of its value and the EUR/USD Exchange Rate ETN (NYSE: ERO) has lost nearly -3%. On the gold side, the SPDR Gold Trust (NYSE: GLD) and the iShares Comex Gold Trust (NYSE: IAU) are both down about -2%. The Market Vectors Double Short Euro ETN (NYSE: DRR) is up more than 5%.

This Swiss peg to the euro forced traders to move out of the franc to the US dollar and the Japanese yen. Japan, which has been trying to depreciate the yen since earlier this year, has not reacted yet, but the safe haven status of the yen has strengthened since the Swiss move, which is not what Japan has been aiming for. And then, there’s gold.

When the US announced that it would make more US dollars available to the European Central Bank, the euro fell and the dollar rose. The effect was to push gold prices down, but that didn’t last long. Now that the world’s safe haven currencies — the Swiss franc, the US dollar, and the Japanese yen — look set to begin a currency battle, gold is the obvious retreat for investors looking for a safe haven.

The dollars that the US Federal Reserve has sent to the European Central Bank have boosted investors’ appetite for risk and somewhat cooled the search for a safe haven. That gold prices are weaker than could be expected indicates that the currency interventions have done their work, but it is not likely that lower gold prices are going to last through the end of the year.

The trend in the betting is against the euro more than it is in favor of the dollar, the franc, or gold. Investment management giant Pimco is betting that the euro will fall against the dollar to $1.20 by the end of the year, from its current level of $1.38. Yesterday’s intervention only strengthened Pimco’s case.

With the world’s governments fighting off currency appreciation at every opportunity, the euro is the likeliest to continue falling. The sovereign debt problems have not been solved and the ECB still doesn’t appear willing to accept the obvious weakness of the eurozone’s banks. Gold prices are most likely to wobble around $1,800/ounce for a while before turning upward again. When the world’s soundest currencies kick off a war, gold’s value as a safe haven can only rise.

Paul Ausick

This hurts exporters who sell into Europe, and if the Euro weakens too much then sales could drop enough that this would even hurt GDP.  Can the Euro’s decline accidentally cause a recession as the economy weakens?  It all depends upon by how much, but the answer is “Yes, at least possibly.”

Now we are seeing calls for a much lower Euro as the panic builds.  Whether it is Greece, Italy, Spain, Portugal, or elsewhere, the scares are still there and they are unfortunately still growing.  There are no more  vacation seasons for Europeans so everyone is back at work.  Just on Thursday, there was an unnamed hedge fund manager calling for Dollar-Euro parity again.  Almost $1.60 in 2008, now $1.365, and then $1.00?

A more sensible call in a more drawn out timeline came from Nick Bennenbroek at Wells Fargo, who said that the Euro could fall to $1.35 or $1.30 rather quickly.  As far as parity, he thinks that would take a prolonged period of maybe 5 years.

Economists, exporters, investors and traders need to remember one thing here about Euro parity.  When the Euro launched, the price was $1.18 rather than $1.00.  Sure, the Euro fell precipitously and ended up down close to $0.80 about ten years ago at the peak.  By our take, True Parity Is $1.18!  The technical parity definition is $1.00.

Now that there are talks of more Greek defaults rising and CDS spreads widening out in Europe, along with central bank resignations, where this one falls is unknown.  The reality is that it will overshoot at the extreme.  All markets overshoot on the way up and on the way down and currencies are no different.

If you are an American, you are already “long the dollar.”  The way to play the currency move against a basket without leverage is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  Its 52-week trading range is $20.84 to $24.02.

As far as tracking the Euro, that can easily be done with the CurrencyShares Euro Trust (NYSE: FXE) if you expect the Euro to rise or the ProShares UltraShort Euro (NYSE: EUO) is you are looking for far more downside.  These are seeing higher than average trading volume as you would expect.

Switzerland is NOT the Euro, it is better.  Still, the CurrencyShares Swiss Franc Trust (NYSE: FXF) is how equity investors play this who do not have currency trading accounts.  That is down under $112.00 per share now, and the 52-week trading range is $96.92 to $139.91.

The good news is that Americans can finally travel to Europe again without having what feels like an idiot tax because the currency is so weak.  The bad news is that this is likely to hurt exports to Europe, and that can have GDP ramifications if it gets too bad.

JON C. OGG

ProShares Ultra Yen (NYSE: YCL) was down 0.2% at $36.85 against a 52-week range of $29.76 to $37.40.  CurrencyShares Japanese Yen Trust (NYSE: FXY) was down 0.2% at $127.87 against a 52-week range of $114.11 to $129.26.  WisdomTree Dreyfus Japanese Yen (NYSE: JYF) is more of a money market rate Yen fund and it was down 1% at $33.34 versus a 52-week range of $30.12 to $34.11.

As far as the Swiss Franc, it hit another new high this morning per the ETF… The CurrencyShares Swiss Franc Trust (NYSE: FXF) was up 0.4% at $126.34 against a 52-week range of $93.57 to $127.99.

Will the European Central Bank be the next to intervene?  Can it even afford to worry about exchange rates with all of its woes with the lands of the PIIGS?  As far as the Euro ETF, the CurrencyShares Euro Trust (NYSE: FXE) fell 0.7% to $142.00 versus a 52-week range of $125.71 to $148.81.

The PowerShares DB US Dollar Index Bullish (NYSE: UUP), which is meant to effectively rise and fall with the U.S. Dollar Index, was up 0.55% at $21.15 today.  We have brought this up before about a speculative ‘flight to safety bubble’ being seen in the Swiss Franc.  Perhaps the same is happening in the Yen.

It turns out that a race to zero in the world of currencies doesn’t do anyone any good if the Americans can’t afford to buy manufactured goods from nations.

JON C. OGG

The Dollar/Franc hit CHF0.8266 in early trading today. Data out of China, and perhaps a hint of QE3, have at least offered a mood that is allowing for some risk trades so far this morning. CurrencyShares Swiss Franc Trust (NYSE: FXF) hit a new high of $119.83 this morning (see 3-year chart from StockCharts.com below), up from a 52-week low of $93.37. As a reminder, it moves inversely with that Swiss Franc ratio. The iShares MSCI Switzerland Index (NYSE: EWL) is up 0.7% at $26.19 today and its 52-week range is $20.64 to $28.57.

If you put this move into the Swiss Franc in comparison, this blows away some of the moves the we saw in the Dollar/Euro. In October, we were at parity with the Franc. Now 0.80 is not out of the question.

As we previously noted on the obvious “AAA” rating, “One of the world’s banking centers and maker of watches and chocolate,  the mountainous nation has a population of just over 7.6 million and GDP of $326.9 billion (2010 est.).  Public debt is still under 40% of GDP, taxation is low, citizenship is not easy to get, and a blended public-private healthcare and retirement model make Switzerland a safe spot.”

There are two key issues to consider here when we ask about a bubble: Compared to Switzerland, America’s population is 310 million and its GDP is about $14.7 trillion (data from the same article). There is just no way that the currency shift can go on endlessly before the Swiss have to intervene themselves against their own currency. If the move continues in this direction, the country will not be able to do any business outside of its borders other than buying foreign assets on the cheap.

Unfortunately, you know the rest of the malaise happening in Europe, Asia, and the ongoing debt ceiling issues in America.  We could elaborate further, but frankly it is becoming routine.

JON C. OGG

Some of the key ETFs we see having longer-term pricing issues after QE2 are some of the main go-to ETFs for traders, but some of our ETFs are inverse and leveraged as well due to the volatility that is sought by traders.  Some of the ETF and ETN products were are tracking are Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ); SPDR Gold Trust (NYSE: GLD) and the PowerShares DB Gold Double Long ETN (NYSE: DGP); CurrencyShares Swiss Franc Trust (NYSE: FXF), WisdomTree Dreyfus Chinese Yuan (NYSE: CYB), and PowerShares DB US Dollar Index Bullish (NYSE: UUP); then there is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) and the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

Financial Stock ETF Winners, Hopefully… and Maybe Housing

Banks and financials have been under pressure due to mortgage put-back fears on mortgage fraud and foreclosure woes.  If any sector could be helped by QE2 and lower rates, it would be banks and financial stocks.  Despite that they are earning very low interest, they also have to pay almost no interest as well.  The triple-leverage funds from Direxion are perhaps the most liquid and most volatile of all in the sector.  There is the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) that move at triple the intraday moves of the Russell 1000 Financial Services Index.  The bullish shares trade close to 35 million shares a day and the bearish shares trade close to 45 million shares a day.  There is deemed a greater risk of tracking error on these due to the volatility, futures contracts, and more, but these are very volatile and very actively traded ETF products.

SPDR S&P Homebuilders (NYSE: XHB) stands to win if housing wins from QE2.  If the foreclosures can be cleared out and if the borrowing rates will stay down at historic lows, then perhaps more consumers will be able to afford houses in 2011 and 2012.  Whether they buy used homes and foreclosed homes is one thing, but many still want that new home that is all theirs and comes with no baggage.  This ETF is full of homebuilding stocks and is meant to track the S&P Homebuilders Select Industry Index, which represents the homebuilding sector inside the larger S&P TMI.

QE2… A Bet Against Currencies or the Dollar

It seems that many developed nations are trying to devalue their currency simultaneously even if the dollar is not in favor.  The only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc, and the Swiss Franc can be traded via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

Another exception is potentially the Chinese Yuan depending upon how the newly elected Congress decides what tone they will use against China.  Almost all investors agree that if China were to de-peg then the Chinese Yuan would rise appreciably against the US Dollar.  China’s reserves are higher and its economic fundamentals are among the best globally.  The two direct beneficiary ETF/ETN products here that will win if China is forced to de-peg the Yuan from the Dollar are WisdomTree Dreyfus Chinese Yuan (NYSE: CYB).

If you think that US Dollar’s decline will not go on and on endlessly, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  This ETN tracks the Deutsche Bank Long US Dollar Futures index, which is comprised of long futures contracts rather than being comprised of raw currencies.  This is against a basket of currencies, and it is less volatile than many other direct single currency.

The FOMC can no longer lower rates on the short-end.  The other side of the coin is that it can promise to keep rates low indefinitely.  Quantitative easing is accomplished by Uncle Sam expanding its balance sheet by buying up debt on the long-end of the yield curve and keeping rates at near-zero on the short-end.  The new verdict seems to be a few hundred billion rather than $1 trillion that will be purchased in Treasury and other debt instruments in the coming weeks.  Some would like to see more, others would prefer no QE2.

The consensus is no longer for a double-dip recession, but growth estimates for what lies ahead remain muted or have come down of late.  It seems that the current inflation is too low for the Fed targets but the recent trends in commodities may be taking care of much of the lack of inflation.  Extremely slow growth is not enough despite a recovery, and the hope is that more jobs will ultimately be created.

The FOMC wants inflation higher, yet it wants rates to stay very low.  These notions fly directly against each other in the long-term, and Ben Bernanke did not exactly get the name Helicopter Ben out of the blue.  It seems that our government is about to turn on the printing presses so it can buy debt.  Yep, devalue your currency but artificially keep the rates lower by buying the debt up.  It almost sounds like tech companies with stock options and non-GAAP earnings.

The rule is and has always been, “Don’t Fight the Fed.”  We can complain about the reckless nature of QE2 and the shackles it may put on the next two or three generations or we can generate trading strategies.

Gold in them thar hills…

When it comes to gold, the SPDR Gold Trust (NYSE: GLD) is king with millions of shares traded each day and with assets above $50 billion.  But what about leveraged ETF or ETN products?  If inflation is going to be manufactured and if gold keeps rising as world central banks race to devalue their currencies, then the PowerShares DB Gold Double Long ETN (NYSE: DGP) is your answer.  Keep in mind that this is an exchange-traded note rather than a true asset trust with physical gold.  The “DGP” gives double the performance of gold.

What about betting for or against currencies?

If everyone is devaluing at the same time, then about the only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc.  The Swiss Franc can be bought either directly or it can be bought via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

The other exception is potentially the Chinese Yuan if the U.S. Congressional move to try to wrangle China from such a tight currency peg.  If China were to de-peg, we have yet to find a real investor who says that China’s Yuan would actually fall against the US Dollar as China’s reserves and fundamentals are among the best globally.  There are two direct beneficiary ETF/ETN products here that will win if China is forced to appreciate the Yuan: WisdomTree Dreyfus Chinese Yuan (NYSE: CYB) and the Market Vectors Chinese Renminbi/USD ETN (NYSE: CNY), although the latter is far less liquid in volume.

Do you not believe that the dollar drop will continue endlessly?  As most financial events peak, markets do usually attempt to discount the news and try to at least work toward the efficient market theory where markets price in almost all available information and discount the rest of the news (so what if it doesn’t work).  If you believe that the Greenback will actually rally soon if and/or when QE2 finally launches, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  In short, this is the ETN that tracks the Deutsche Bank Long US Dollar Futures index, but be advised that the index is comprised of long futures contracts  rather than of raw currency.  It is also nearly impossible to forget the one rule if you are a US investor: You are already long the US dollar.

Over the past few months there has been tremendous force behind the decline of the dollar.  The United States has taken on Japan’s pre-crisis role of carry trade funds.  With U.S. short-term rates close to zero, investors have borrowed in dollars and then selling them to invest in higher yielding currencies.  Officials at the Fed have stated that the watching jobs data to signal when it is safe to raise interest rates.  Today’s job data appears to have spooked carry trade participants, making them believe that time will come sooner rather than later.  The dollar’s rise have prompted a near 5% decline in the price of gold, which has moved inversely with the dollar.

This movement in the currency dollar (and the related movement in gold) is probably overdone.  While positive news from the job market makes a rate hike more probable, it will not be happening any time soon.  There is no reason to believe that November’s job improvement is the start of a trend.  Furthermore, inflation data is hardly weighing on Fed officials.  In the meanwhile, short-term interest rates at still near zero and investors still see plenty of yield overseas.  As the effects of this most recent job report wear off, the dollars is likely to resume is march downwards.

Garrett W. McIntyre