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Hedge funds turn positive on euro for first time since 2014

Hedge funds have turned positive on the euro for the first time since 2014, as the continent enjoys accelerating economic growth and puts divisive elections in France and the Netherlands in the rear view mirror.

Data released by the US Commodity Futures Trading Commission late on Friday showed that leveraged funds, a proxy for the hedge fund industry, had a net long position in euro futures contracts this week.

The number of bets against the currency has been dwindling this year, and there is now a greater volume of bets on the euro rising, the first net positive position since May 2014.

Investors have turned their attention to the European Central Bank meeting next week, where policymakers are expected to sound a more optimistic note on the economy and could declare that, in their assessment, the upside and downside risks to growth are broadly balanced.

“There is a prevailing narrative flowing through the market that the ECB will upgrade its assessment of the balance of risks to be more neutral,” said Mazen Issa, a currency strategist with TD Securities.

“Markets are forward looking and they’re starting to latch on to this theme that . . . the ECB is moving away from its very dovish, accommodative monetary policy.”

The increasingly bullish view on the common currency follows Emmanuel Macron’s victory in the French presidential election last month, which damped fears that the eurozone’s second-largest economy could exit the bloc. Alongside quickening earnings growth and rosier expectations for the economy, the euro has recorded two consecutive months of 2 per cent plus gains, the first time it has done so since 2012.

Hedge funds’ bullish bets outnumbered short positions, which profit when the euro falls, by 5,646 contracts in the week to May 30, according to the CFTC data. The net long position is valued at $789m — a sharp reversal from a peak last November when shorts exceeded bullish bets by $21.8bn.

“You are seeing improved sentiment around growth,” said Brian Kennedy, a portfolio manager with Loomis Sayles. “The biggest risks to Europe were elections and you have had the best outcomes possible from a market perspective in the Netherlands and France.”

Like hedge funds, traditional asset managers have also been taking a more positive view of the euro. Asset managers recorded their largest net long position in euro futures contracts since at least 2006 last week, the CFTC data show. Their long positions surpassed short positions by more than $14bn.

While an early election in Italy could once again swing optimism against the euro, the common currency on Friday traded to its highest level against the US dollar in nearly seven months.

It has advanced 2.6 per cent against the UK pound and 7.3 per cent against the US dollar this year. Asset managers last week cut their net long position in the dollar to the lowest level in two years.

Mr Issa of TD Securities warned that the “rather swift” move to go long euro futures could signal “some risks” for the currency. “The market may be getting too far ahead of itself in terms of the euro achieving escape velocity,” he said.