The Euro and U.S. Dollar Index make an excellent trading pair because of their close and predictable relationship. This pair offers the possibility of several profitable trades each year.
The Euro and Dollar Index chart illustrates the trading potential of the continuing relationship between these currencies. For the Euro, I’ve used Invesco CurrencyShares Euro Trust (FXE) and Invesco DB U.S. Dollar Index Bullish Fund (UUP) represents the dollar index. As you can see, there is always a “mirror image” effect between them. When one goes up in price the other goes down, and vice versa. This is because the chart that extends from August 2017 to August 2018 and has almost 58% of the dollar index price movements attributable to the Euro.
The Euro is one of 6 currencies whose price movements inversely determine the price changes of the U.S. Dollar Index. This currency basket is comprised of Euro 57.6%, Japanese yen 13.6%, British pound 11.9%, Canadian dollar 9.1%, Swedish krona 4.2%, and Swiss franc 3.6%. The relative proportions are based on the amount of trade between the U.S. and each country
One advantage of pairs trades such as the Euro and U.S. dollar is the potential for several trading opportunities in each 12-month period. Support for this is shown by the 2 or 3 profitable opportunities to trade. Another plus is the choice of trading with ETFs whose stock price movements match those of the corresponding futures contracts.
The chart below shows a quiet period from August 2019 to March 2020 – a month of very volatile price movements in equities and futures markets that also served as a wake-up call to the Euro-U.S. Dollar Index pair. Plus and minus variations in the prices of FXE and UUP ranged from 2-4% compared to the beginning ETF prices on September 10, 2019. On that date, the Euro ETF, FXE, was $104.93 and the U.S. Dollar Index ETF, UUP, was priced at $26.23.
The chart shows that the Euro is higher than its beginning price by approximately 4%, or slightly more than $4.00 per share. The U.S. Dollar Index is lower by approximately 6%, or $1.20. When these ETFs return to zero price change and possibly exchange plus and minus positions from the beginning prices, the trading profit will add up to at least $5.00 per pair of FXE and UUP stocks plus the additional profit that will occur when they go beyond a zero price change in the opposite direction before the trade is completed. Assuming a trade with 100 shares of each ETF, this could produce a gain of at least $500 less trading commissions.
The Euro – U.S. dollar pair trade is somewhat unusual in that the U.S. dollar price changes are heavily influenced by the other member of the pair, the Euro. Another more normal pair would be one in which a member of the pair has a stable price while the other member has price changes that are more volatile.
In trading the Euro and U. S. dollar pair we are depending on price movements in opposite directions to form the beginning tradable spread and then a predictable return to where their percentage price changes from an earlier date become approximately zero and then move in the opposite direction – a positive percentage becomes negative for one of the pair while the directions are reversed for the other. The primary supporting fact is that the dollar index is heavily influenced by shifts in the price of the Euro, and in the opposite direction. With careful trades using these ETFs, you should be able to profit from this ongoing combination.