(Reuters) – ORLANDO, Fla.The European Central Bank seems ready to start raising interest rates next month, giving hedge funds a chance to buy up euros. And they are doing that very thing.
Based on data from the U.S. futures market, speculators have their largest net-long euro position in 12 weeks, and May was the second-best month-to-month change in positioning for funds in nearly two years.
The latest report from the Commodity Futures Trading Commission shows that funds increased their net-long euro holdings by about $2 billion in the last week. This made up two-thirds of a $3 billion drop in the overall long-dollar position against G10 currencies.
In fact, the net-long dollar position against the G10 has gone down by $5 billion in the last two weeks because net-long euro positions have gone up by the same amount.
The CFTC funds’ net-long euro position reached a three-month high of 52,272 contracts in the week ending May 31, up from 38,930 the week before. Their bet on the euro going up is now worth $7 billion, which is more than the $5.2 billion it was worth a week ago.
A long position is a bet that the value of an asset or security will go up, and a short position is the opposite.
CFTC euro position-$value-https://fingfx.thomsonreuters.com/gfx/mkt/lbvgndxwmpq/CFTCNetEUR.jpg
CFTC euro positions-monthly change-http://fingfx.thomsonreuters.com/gfx/mkt/lgvdwebxgpo/CFTCEURMONTH.png
ECB ON THE LOOKOUT FOR A 50 BPS INCREASE?
The change in what people expect from the ECB has been remarkable. Only a month ago, CFTC funds had a small net-short euro position. The euro fell as low as $1.0350 in mid-May, and people were talking a lot about the dollar being worth the same as the euro.
But inflation in the euro zone keeps going up. In May, it hit an all-time high of 8.1%, and now the question is not whether the ECB will raise interest rates in July for the first time in over a decade, but by how much.
graph showing the exchange rate between the euro and the dollar: http://fingfx.thomsonreuters.com/gfx/mkt/egpbkwglwvq/EURUSD.png
Several ECB officials have talked about the possibility of a 50-bps move, and economists at Deutsche Bank (ETR: DBKGn) now expect that one of the two rate hikes in the third quarter will be a 50-bps move, most likely in September but also possible in July.
Economists at Societe Generale (OTC: SCGLY) wrote on Friday, “We wonder why the ECB hasn’t done anything yet.”
On Thursday, the ECB is likely to explain how rates will go up in July. The money markets in Europe expect rate hikes of 100 basis points by October and 125 basis points by the end of the year, and the euro has risen to a one-month high close to $1.08.
People in the foreign exchange market are paying attention to the ECB’s talk about fighting inflation and putting out of their minds the bank’s rate hikes in 2008 and 2011, which many analysts say were major policy mistakes.
At least for now, hedge funds are also on board.
There are also:
Hedge funds plan for U.S. growth to slow down and rates to rise (May 23).
Yellen could face G7 pressure on the dollar (May 18).
(The author is a columnist for Reuters, and these are his or her thoughts.)
(Written in Orlando, Florida by Jamie McGeever; graphics by Jamie McGeever and Saikat Chatterjee; edited by Matthew Lewis)