Traders are more bullish on the euro than they have been in 18 months as investors continue to snap up peripheral eurozone assets, according to a widely used measure of traders’ positions in the foreign exchange market.
Net long positions on the euro reached their strongest level since the summer of 2011 last week, according to figures from the US Commodity Futures Trading Commission that are used as a proxy for hedge fund investors in the global currency market.
The figures, which also showed traders continuing to cover short positions in the euro-dollar pair, come as improved sentiment on the eurozone has helped the single currency to trade at an 11-month high, touching close to $1.35 against the dollar on Monday.
“The euro is the risk-on currency at the moment,” says Nigel Sillis, head of research for fixed income and currencies at Barings, the asset manager.
The euro received a boost on Friday after the European Central Bank revealed that European banks were set to repay a higher than expected amount of the cheap funding they obtained under the central bank’s longer-term refinancing operations.
Investors have also been closing short positions in the euro as the single currency’s attraction as a funding currency has diminished, after the ECB sounded a more hawkish note than expected earlier this month when it held interest rates at 0.75 per cent for the eurozone. Borrowing euros to invest in higher yielding currencies including the Australian and Canadian dollars was a popular trade in the foreign currency market last year.
“Investors are covering shorts in the euro-dollar as they abandon the idea of ECB rate cuts,” said John Normand, strategist at JPMorgan.
But the extremely negative market positioning in the euro in the past has left analysts and investors uncertain of the single currency’s direction. Much of the move in the single currency this year has been attributed to a “short-covering rally” as investors have scrambled to rebalance their portfolios as the outlook for the eurozone has improved.
An average of 59 analysts tracked by Bloomberg still predict the euro will fall to $1.30 by the end of the first quarter of the year.
The CFTC’s Commitment of Traders report showed that net long contracts on the euro-dollar rose to 21,381 last week, their highest level since July 5, 2011.