There’s something a bit weird going on with the euro: it looks like hedgies have learnt to love it again, but it’s just not climbing.
Usual caveat: the US currency futures market represents a small slice of a very big thing. Nonetheless, the weekly data released by the Commodity Futures Trading Commission do offer decent insight into what the broader speculative community is up to in the currencies market.
The latest batch, released last Friday, highlights an increasingly emphatic trend: the net bet against the euro is shrinking fast. Having been seriously gloomy on the currency when the European Central Bank began its bond-buying programme in 2015, speculators are now almost flat. Alan Ruskin at Deutsche Bank points out that this is not just about position squaring; outright longs on the currency have hit a record. All that (almost certainly premature) talk of the ECB turning off the stimulus taps seems to be drawing in fans.
Mr Ruskin reckons the euro “should”, if the usual correlations applied, be trading at about $1.15. It’s at $1.06.
The growing, potentially heroic long positions are tough to explain. Their impact may be dulled by the fact that macro funds are just not the force they once were; FX funds’ returns have been drab of late, again. But in any case, if the euro can’t get its rallying boots on with that kind of speculative backing, it’s worth respecting the downward drag.
What is clear is that overall negative bets on the currency are at most light. For all the scary noise about French politics, investors are not actively betting on an adverse election outcome. If anything, the opposite may be true. They may have hedged for a calamity, and the strength of the yen and the performance of euro options and Bunds suggests they have, but they are not betting on it as such. Broadly, they’re sitting on their hands. Trading volumes, and not only in currencies, are said to be unusually light.
All that in turn suggests that if the French elections do get nasty, or even if eurozone inflation comes stumbling back down to earth, there are still plenty of potential new sellers. The scope for the currency to tumble is substantial, more so than any chance of a serious rally if and when the clouds clear.