LONDON (Reuters) - Hedge funds turned their most bullish on the euro in well over six years last week, betting it will rise in value and put a gloss on what has so far been a mediocre year for returns.
The latest futures market positioning data from the Chicago Mercantile Exchange show speculators increased their net long euro positions to 98,079 contracts in the week to Oct. 10, the most since May, 2011.
Collectively, that’s a $14.5 billion bet that the euro will strengthen. Not only is it the most bullish euro positioning in six and a half years, hedge funds and other speculators have only been more euro-bullish 11 other weeks since the currency’s launch in 1999. They were all between Dec. 2006 and July 2007.
It’s the third week in a row hedge funds have increased their net long euro positions, suggesting they’re gunning for a break above $1.20. It hasn’t happened though - the euro hasn’t been above $1.20 since Sept. 22, pretty much three weeks ago.
The euro opened the year at $1.05, and the overwhelming consensus at the time was for a break below parity. That didn’t happen, and it sailed all the way towards $1.21 in early September. But it’s struggled to keep a foothold above $1.20, and on Monday was trading below $1.18.
The European Central Bank is expected to outline plans later this month to extend its stimulus programme for nine months while scaling it back, an attempt to reconcile the bloc’s best growth run in a decade with inflation undershooting the bank’s target of almost 2 percent for years.
Hedge funds will be hoping the euro can make that break above $1.20. Macro funds, which take longer-term directional bets on currencies and interest rates, have had a bad year. Market volatility has never been lower, bond yields haven’t risen as much as expected and returns have been patchy, at best.
The BarclayHedge Global Macro Index was up 2.03 percent January-September, the second worst performance of 16 sub- indices of the broader Hedge Fund Index, which was up 7.4 percent over the period. Drilling further into BarclayHedge data, currency hedge funds’ median rate of return in September was just 0.18 percent.
For comparison, the S&P 500 index is up 14 percent so far this year, and the MSCI World stock index up 17.5 percent.
Although hedge funds doubled down on their bullish euro bets in the latest week, they dialled back a bit on their overall bearish stance on the dollar.
That was largely down to the third straight increase in net short yen positions to 101,419 contracts, worth more than $11 billion. The net short yen position has doubled in the past four weeks.
But again, this has been a frustrating trade for hedge funds recently. The dollar has been stuck in a narrow 111-113 yen range for the best part of a month, slipping to a three-week low of 111.64 yen on Monday.
Japanese Prime Minister Shinzo Abe's ruling coalition is on track for a big win in Sunday's general election. Investors reckon his victory would make certain that the Bank of Japan will stick to the current easy policy even after current BOJ Governor Haruhiko Kuroda's term expires next year.
Overall, hedge funds trimmed their bets on the dollar falling for the second week in a row. The CFTC net short dollar position against six major currencies fell to $15.4 billion from $16.8 billion the week before.
A broader measure of speculators’ net short dollar bets, including against some leading emerging market currencies, fell to $19.28 billion from $21.01 billion a week earlier.
Two weeks ago, the value of that bearish dollar bet stood at $21.1 billion, the biggest short position since January, 2013, according to Reuters calculations. So while they may be scaling back a bit, hedge funds remain extremely negative on the dollar.
The opinions expressed here are those of the author, a columnist for Reuters.
Reporting by Jamie McGeever; Editing by Jeremy Gaunt