Deutsche Bank rolls out first leveraged dollar ETNs amid renewed interest in FX markets

By Emma Trincal

New York, May 24 - Deutsche Bank AG, London Branch announced the launch of two new exchange-traded notes that are the first products of this kind to give investors leveraged exposure to the dollar, a bank press release said.

The new products emerge amid a renewed interest in the dollar among institutional and retail investors alike, a market participant said.

"This is the first time a leveraged exposure to the dollar is offered in an ETN wrap," he said.

The PowerShares DB 3x Long US Dollar Index Futures ETNs and the PowerShares DB 3x Short US Dollar Index Futures ETNs are designed to provide triple long exposure and triple short exposure, respectively, to futures contracts on the U.S. Dollar index.

The index reflects the value of the dollar compared to six of the world's most traded currencies: the euro, the yen, the Canadian dollar, the British pound, the Swedish krona and the Swiss franc.

Deutsche Bank noted that these ETNs expand on its PowerShares DB US Dollar Bullish fund and PowerShares DB US Dollar Bearish fund, which are two exchange-traded funds linked to the same index.

Interest in the new leveraged ETNs was an extension of the popularity of those two ETFs, the market participant said.

ETF expansion

"There's been a lot of demand for our single leveraged ETFs, with people buying and selling options on those. Since options are leveraged by definition, it suggested a strong interest in a leveraged instrument," the market participant said.

The existing bullish ETF has about $1 billion in market capitalization and the bearish product about $100 million.

"I wouldn't be surprised if you would find the same ratio between long and short for the leveraged products," the market participant said.

FX is hot

The need to create the new ETNs came from current demand for foreign-exchange instruments, the market participant noted.

"The dollar is a hot topic right now," he said. "Investors in general are becoming more and more interested in FX products."

He added that the US Dollar index is the right benchmark because it's linked to a basket of currencies and not just one currency.

"The dollar/euro relationship is more of a story about the European debt crisis. The dollar/yen is more about Japan. The U.S. Dollar index gives you the big picture," he said.

There are several leveraged ETFs that currently give investors long or short exposure to the dollar. But so far, no such product existed in the ETN space, he said.

"ETNs were out of favor after the financial crisis of 2008 because they are debt instruments and ... investors are exposed to credit risk. But they're coming back."

One of the benefits of ETNs compared to ETFs, he added, is that they can replicate the underlying index without any tracking errors.

Broad interest

Demand for the two new ETNs came from a blend of institutional investors and retail investors, this market participant noted.

"It's going to be used by retail and institutional investors alike, by short-term traders and long-term investors and by investors who are bullish or bearish on the dollar," he said.

The new ETNs can be used for hedging purposes or to express a view on the dollar.

"Leverage allows you to spend less capital to put up the same position," the market participant said. "Rather than having to put $1 million, you put $333,000. So it's a good way to hedge."

Surfing the rally wave

But the products could also be used for directional bets.

"These new products give an advantage to an investor who wants to maximize his exposure to the dollar," said Tim Fortier, managing partner at Structured Products Advisors, LLC.

Among them are the growing numbers of investors who have recently turned bullish on the U.S. currency.

Interest in the dollar has gained momentum this month as the dollar rallied on recent European sovereign debt headlines. With the Fed's quantitative easing policy coming to an end in June, commodities and stock prices have also been selling off, comforting the dollar bulls, said Fortier.

"Asset classes will no longer have an artificial support," he said.

"I could see myself using the bullish version of these ETNs. I'm bullish on the dollar because I see weakness in the euro. In addition, sentiment has been extremely bearish on the dollar, and usually you see an extreme sentiment at a turning point. If the euro breaks 140, it will really ignite the bulls," he said.

The euro is currently trading at 1.41 dollars.

Ananthan Thangavel, founder of Lakshmi Capital, said he sees the dollar continuing to rise as well, although he is bearish on the dollar against emerging market countries and Australia.

"I'm bullish on the dollar index because I don't view the euro as attractive. I think it's going to decline against the dollar going forward because of the default risk in Europe."

But he said that he would not use a leveraged ETN to express his bullish view on the dollar.

"Why would you take the credit risk? I would much rather trade with futures contracts on the index or in the actual forex," he said.

Taking a directional view on the dollar right now is risky, a currency strategist said.

"A lot of different factors are impacting the dollar: the end of QE2 coming up, the perception of inflation, the weak economic data in the U.S. and the flight to quality. Uncertainty is very high due to these many variables. And it's not only in the U.S. but also in the rest of the world."

Monthly reset

The leverage used in the two ETNs will be reset monthly. The market participant said that the 12 times a year leveraging can offer benefits compared to a daily reset.

"Daily reset works well when returns move in one direction, for instance if it's up day after day, then the daily rebalancing works well. But in real life, returns zig zag their way up. In that case, the monthly reset takes the noise out of the up and down," he said.

The PowerShares DB 3x Long US Dollar Index Futures ETNs and the PowerShares DB 3x Short US Dollar Index Futures ETNs will be listed on the NYSE Arca under the symbols "UUPT" and "UDNT," respectively.

The products were launched and announced by Deutsche Bank and Invesco PowerShares Capital Management, LLC jointly.

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