S&P Not Fussed On Dollar, EM Currency ETFs

Currency investing is not the easiest endeavor, but ETFs should make it a bit easier, right? Maybe not. Although trading forex pairs is easily quantified with a winning and losing currency on each side of the pair, things have turned tricky at the ETF level.

BlackRock (BLK), the world's largest ETF sponsor, recently said there is $4.3 billion invested in various currency ETFs and ETNs, but investors pulled $55 million from those products last month, bring the year-to-date outflows to $79 million.

ETFs that track struggling currencies such as the Australian dollar and plunging emerging markets currencies would seem to be obvious offenders in the current environment, but S&P Capital IQ offered up a less-than-encouraging assessment of the U.S. Dollar Index in addition to emerging markets fare.

"According to Mark Arbeter, S&P Capital IQ's Chief Technical Strategist, the U.S. Dollar Index continues to fall after hitting some tough overhead supply from its prior high from July 2012 in the 83 to 84 region. Arbeter notes that since the closing high of 83.22 at the end of March and the intraday peak of 83.49 in early April, the index has dropped to just below the 81 level, the lowest it has been since February," S&P Capital IQ said in a new research note.

A look at the PowerShares DB US Dollar Index Bullish (UUP), which is the Dollar Index tracking ETF, shows S&P Capital IQ might be on to something. Despite savage repudiation of riskier developed market currencies and emerging markets currencies of all stripes, UUP has lost 3.3 percent in the past month and looks poised to test support at $21.60.

"Commitment of Traders (COT) data continues to warn that the greenback may see additional profit taking, according to S&P Capital IQ. Commercial hedgers remain net short by a large margin. At the same time, large and small speculators remain very bullish toward the dollar with respect to their futures positions. Many times in the past, this combination of
COT data has led to decent-sized pullbacks, according to Arbeter," said S&P in the note.

The research firm was equally cautious about the WisdomTree Dreyfus Emerging Currency (CEW), an ETF that tracks 15 developing world currencies.

"Fears of a peak in global monetary stimulus have led to profit taking in many popular higher-yielding emerging market currency carry trades that have benefited from extreme central bank policy accommodation, leading to a broad based sell-off in EM assets from stocks to bonds," said S&P analyst Alec Young.

Of course, there is another side to the story. UUP has seen inflows of almost $86.4 million over the past month, while its bearish equivalent, the PowerShares DB US Dollar Index Bearish (UDN) has not received any new capital, according to PowerShares flow data.

As for CEW, it can be argued that investors are treating emerging currencies, particularly the Asian ones, as if today's environment's resembles the days of the Asian and Russian defaults. A case can be made that emerging currencies have been beaten up too much too rapidly and a buying opportunity may be near.

One day is just one day, but it is worth noting CEW gained 0.74 percent Thursday on volume that was more than seven times the daily average.

BY Todd Shriber, ETF Professor