FXE: Declines Are Coming

ETFS

As the coronavirus pandemic continues to inject elements of uncertainty into the financial markets, investors seem to be testing various assets in order to identify the instruments that are most likely to possess safe haven qualities. Since May 2020, valuations in the Invesco CurrencyShares Euro Trust (NYSEARCA:FXE) have risen by over 5.5% and these moves might be giving some investors an idea of strength as a preferred safe haven asset. However, there are several technical and fundamental factors that suggest prospects for a downside reversal are building. If the current trends in this macroeconomic framework continue, reversal declines in FXE could depress valuations and send the fund toward prior lows of 102.20 in the next 2-3 months.

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Source: Author via Tradingview

Over the last six-month period, the Invesco CurrencyShares Euro Trust has encountered net flows of -106.3 million. In the chart displayed below, we can see that the height of recent bullish activity occurred near the end of March and during the early parts of April 2020. However, most of this chart indicates bearish transaction activity and this fact alone should be enough for investors to be wary of the potential for new price highs in FXE. This period of time reflects the increases in market volatility that occurred as a result of the COVID-19 pandemic, so this should work as an indication of where trends might be headed in the future.

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Source: ETFdb

A similar picture emerges if we analyze FXE trading flows that have been recorded over longer-term time frames. Over the last three-year period, the Invesco CurrencyShares Euro Trust has encountered net flows that are more deeply negative at -217.4 million and this suggests that the bearish trajectory is firmly solidified. Of course, this pre-dates the COVID-19 macroeconomic environment and shows the extent of the vulnerability that stood in place before broader market volatility reached historic levels.

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Source: ETFdb

During the first-quarter period, eurozone economic growth figures dropped by 3.8%. This decline was smaller than expected but the performance followed a dismal performance of 0.1% during the fourth-quarter period of 2019. Ultimately, this paints a picture of a region that was on a weak economic footing even before the COVID-19 pandemic limited consumer activities and required businesses to close if they were characterized as “non-essential”. The negative GDP rates that were posted during the first-quarter period are already the worst on record and this puts rising currency values in a questionable position.

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Source: BBC News, Eurostat

In Germany (the largest economy in the bloc), GDP declines were the deepest we have seen since 2009 and quarterly results from Italy, France, and Spain were the worst on record. Germany, Italy, and France have already entered into a recessionary period and we expect more countries to be added to this list once the GDP results for the second-quarter period are released.

During the month of May 2020, regional unemployment figures in the European Union rose to 7.4% after a long period of decline:

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Source: Eurostat

In other cases, we might have seen analysts dismiss negative changes in the region’s base unemployment figures due to general weaknesses in the labor participation rate. However, it must be noted that the labor participation rate actually rose to long-term highs during the fourth-quarter period of 2019 (at 57.6%):

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Source: Trading Economics, Eurostat

In labor markets, this is an upward trend that had been in place for the entire period in 2019 and it would be difficult to make a dismissive argument which might indicate a more positive explanation for recent increases in the regional unemployment figures. The fact remains that the economic uncertainties that have been created by the COVID-19 pandemic have negatively impacted a large percentage of the available workforce in Europe and problematic trends could expand if regional governments make reductions in unemployment benefits. As long as the COVID-19 pandemic continues to drive uncertainty and volatility in the financial markets, investors will need to identify protective assets in order to gain shelter from the storm. Recent rallies in the Invesco CurrencyShares Euro Trust might be giving some investors an idea of strength as a preferred safe haven asset. However, the prospects for a downside reversal are building and bearish reversals in FXE could send valuations much lower in the next 2-3 months if these current macroeconomic trends continue.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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