Euro & Dollar Parity, Reality Versus Perception (FXE, EUO)

It is no secret that suddenly the U.S. dollar is back as the king, and more importantly that the Euro could be changed to the peso.  The euro was over $1.50 just at the end of last year and now it has flirted with $1.20.  Our technical analysis affiliate Adam Hewison of INO has a short audio-video chart presentation calling for parity as it stands.  We would still like to throw out the notion that parity here in the case of the euro should not be considered the real parity benchmark of a 1:1 ratio despite the mathematical definition.   We of course measure this with two liquid and active ETF/ETN products: CurrencyShares Euro Trust (NYSE: FXE) and ProShares UltraShort Euro (NYSE: EUO).

The formal launch exchange rate was $1.18 per euro in 1999.  At the launch of the Euro, it lost value immediately and then it was not until 2003 that it was back above the $1.18 mark.  When I was in Europe in 2002, the Euro was running well under $1.00.  In fact, it was under $0.90 at the time.  At the 2008 peak, it was just under $1.60.

CurrencyShares Euro Trust (NYSE: FXE) is designed to track the price of the euro net of Trust expenses, with a ratio of 100:1 based upon the share price.  ProShares UltraShort Euro (NYSE: EUO) has a stated mandate of trading at twice the inverse performance of the EUR/USD daily price change, although there may be tracking error and due to leverage there may be resets that seem different from the market. The FXE is down 0.4% at $123.03 and the EUO is up 0.65% at $24.70.

The current measure of the Euro is of course going to create a changed environment for those companies which have much business depending upon Europe.  But unless the implied $1.18 per Euro parity gets taken out and then the classical $1.00 per euro comes into play, then the Europeans are getting far too much credit for their value-added to the global economy.

Can the EuroZone woes continue to plague the markets?  Absolutely.  Should they?  At some point, they have to be discounted.  Webster’s dictionary defines parity as:
1) the quality or state of being equal or equivalent
2) a- equivalence of a commodity price expressed in one currency to its price expressed in another; b- equality of purchasing power established by law between different kinds of money at a given ratio

Maybe this is really just a parody of parity.

JON C. OGG