As I begin the integration of FXE and EUR/USD tactics this might be a good time to look at the price differential of these two instruments. The FXE Euro Trust ETF is a Rydex product comprised 100% of the Euro. This is in contrast to the EUR/USD forex spot market product which is typically priced about $ .50 above the net Euro.
As a practical matter for traders this differential offers no competitive edge in terms of arbitrage or cross trading. The mark up of the spot market is highly linear, regardless of the session and the only edge for active traders can be found in the highly liquid market sessions where the spread may narrow by a full pip or more.
Several disadvantages of trading FXE in lieu of the EUR have been noted previously. Most obvious are the EUR’s 24 hour market and the availability of discretionary leverage. While FXE spreads are typically only a penny, when we consider FXE options to gain some leverage the story changes . . where nickel to .08 spreads are the norm and both liquidity and open interest are thin, especially in the calls. Trying to put on an option trade at the open, regardless of the side, can be frustrating at best using limit orders and the trader is left to the mercy of the market makers on market orders. . . in short, a scenario to be avoided. The option liquidity constraint creates a trading environment wherein the best executions (lowest seepage) can only be accomplished in calm markets well after the open or before the close . . . clearly not a attractive prospect for most traders.
The fall back tactic therefore when trading FXE is to trade in size, possibly putting a constraint on one’s capital resources unless margin is employed. While these parameters tend to paint a discouraging picture for trading FXE (it gets even grimmer with FXY and FXB) there are some tactical approaches that may yet make FXE trading viable and in upcoming posts I’ll endeavor to explore a few.
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