Hedge funds drove bearish bets on the euro to a near one-year high as markets gambled the European Central Bank has finished raising interest rates.
According to Commodity Futures Trading Commission statistics, leveraged investors increased net short holdings in the shared currency to 23,306 contracts during the week ended Sept. 19, the largest since Oct. 11. Long-term asset managers also reduced bullish bets on the currency for the sixth week in a row.
“Europe is struggling with anemic growth and sticky inflation, while the US is enjoying above-trend growth that is backed by a strong consumer,” said Ashvin Murthy, chief investment officer at hedge fund AVM Capital Pte. Ltd. in Singapore. “This period of US exceptionalism is supporting the US dollar, and we expect the euro to remain under pressure for the next six months.”
The euro has dropped for 10 weeks in a row, the longest run of losses since its launch more than 20 years ago, as slowing economic growth reduces demand for the currency. Cooling inflation and growing worries of a recession have prompted traders to wager on the likelihood of the ECB cutting rates by 25 basis points next July, adding to bearish emotion against the euro.
Eurozone inflation statistics anticipated this week could provide a further impetus for investors to short the currency, which has lost more than 2% against the US dollar this quarter. In Asia trade on Monday, the euro was little changed at $1.0650.
According to Bloomberg statistics, Capital Economics sees the euro returning to parity with the dollar by year’s end, while RBC Capital Markets expects the currency to hit $1.02 by the second quarter of 2024.
According to Carol Kong, a strategist at the Commonwealth Bank of Australia, “slowing growth momentum in the eurozone economy” is contributing to the pessimistic wagers. “To the extent euro has been overbought, the increase in shorts wasn’t too surprising.”