The euro has a new breed of fan. Behold the true believers.
The currency has now fully shaken off the dent it suffered in the aftermath of the US presidential election. At over $1.12, the euro is up to its strongest level since mid-November. On a trade-weighted basis, it is even more impressive, with the currency at its strongest point since January 2015. It has proven the fastest rising major currency in the world this year.
Some of this, of course, is down to Donald Trump. The US president’s fresh self-inflicted credibility crisis has hammered the dollar in a market pattern that Nordic bank Nordea calls “Trumpbulence”. This ugly portmanteau aside, the Trump wobble is powerful — as the bond markets also demonstrate. Having run a record net short position on US government bonds as recently as March, speculators have flipped to the largest long position in seven years.
But for the euro, it is not just dollar phobia at play, as this week’s run of sparkly eurozone economic data attest. In the major economies, French businesses are in their healthiest state in six years, and the record high in German business confidence is not to be sniffed at. Even Germany’s famously rather dour Ifo think-tank, which compiles the latter index, goes as far as to describe the climate as “euphoric”. It does not use such giddy language lightly, and the enthusiasm is matched in the stock markets. Investors are running the third-highest allocation to eurozone stocks on record, according to Bank of America Merrill Lynch. Nearly 60 per cent of investors in its survey said they were overweight eurozone equities in May, up from 48 per cent in the previous month.
The best bit, for euro bulls: it seems those equity investors are not hedging their exposure to the currency. Stock market inflows in late 2014 and early 2015 in the run-up to extra stimulus from the European Central Bank were huge, but those flows came amid heavy selling of the euro.
This time, as Nordea points out, almost none of those equity inflows are currency hedged. This must be love. An early summer fling, perhaps, or even a rebound from a troubled relationship with the dollar, but a tough one to resist for now.