Euro Bets Hit Record: Why & How?

The euro climbed each day last week and is also up so far in August. Notably, futures speculators continue to pour money into bets on the single currency, with CFTC net positioning hitting another record at 200,000 futures contracts long (see chart below). To put that into perspective, the record net short at the depths of the euro crisis was -227,000. Before we explain the possible reasons; Ashraf mentioned to me that breaking down the 200K in net longs, they consist of gross longs hitting a record while gross shorts hitting 6-yr highs, reflecting the power of momentum from the longs. He also says that net speculative shorts in USDX futures are at 3-yr lows and not all time lows.

There are no easy answers because the same things that have been dogging the euro for a decade are still there: namely, the lack of dynamic growth along with painfully slow efforts to integrate and cooperate. Instead, we get years-long battles about an extra 0.2% of debt-to-GDP in Italy's budget.

One thing that has changed is the coronavirus response. It hit Europe hard before the US but the response has been better and cases are now much lower. There is a growing belief that will lead to a faster recovery this year and in 2021. With that in mind, the recent tick higher in cases in Europe bears watching because it could easily undo that narrative.

The second factor is asset valuations. The MSCI US index trades at a 22.5x forward P/E while the eurozone equivalent is at 17.4. The FX market for a generation has been focused on global yield differentials but with those zeroed out, marginal dollars are instead moving based on stocks.

A third factor is the US election and the potential uncertainty. Investors have grown used to uncertainty and Europe has had plenty of its own scares but there is still a portion of the investment community that would rather be invested in Europe than the US on November 3.

The final factor is the structure of the euro. Debt monetization is a real threat in the decade ahead and the deficits in the US in years to come will be enormous. That may spark better growth but if it comes with inflation, the governance structure of the euro is better equipped to handle it. Moreover, no country has ability to print in the same way the US Treasury does. So while the ECB has certainly waded into QE, the market is more comfortable with the checks and balances in Europe.

Ultimately, all questions of price are value and some or all of the things noted above are already priced in. At +200K, the trade is arguably more crowded than ever. But futures positioning tends to move slowly and reflects long-term positioning. Certainly the virus and the election could be game-changers but signal from the futures market is to buy the euro dips.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +200K vs +180K prior GBP -3K vs -15K prior JPY +27K vs +31K prior CHF +17K vs +12K prior CAD -30K vs -23K prior AUD -1K vs -1K prior NZD 0K vs -1K prior