You are using an older browser version. Please use a supported version for the best MSN experience.

‘Too weak’ euro turns top performer on equity flows, fund buying

LiveMint logoLiveMint 25-05-2017 Stefania Spezzati

London: It was supposed to be a year of risk that could lead to a break up of the euro. It’s turning out to be the best year in a decade for the shared currency.

The euro hit a six-month high against the dollar this week and is on track to be the top-performing currency in the Group of 10 in the first half of the year. Defeat for anti-euro candidates in the Dutch and French elections, better-than-expected regional economic data and increasing fund inflows into Eurozone equity markets are all making investors more confident on the outlook.

“There is a positive momentum on flows, with more hedge funds joining the euro trade,” said Athanasios Vamvakidis, head of the G-10 currency strategy at Bank of America Merrill Lynch, which has a long position on the shared currency against the yen.

Foreign investors have bought $7 billion of Eurozone exchange-traded funds without a hedge on the currency since March, compared to only $0.9 billion hedged, according to Morgan Stanley. The US bank’s “trade of the week” is to buy the euro against the yen.

While longer-term currency investors such as asset managers are buying the euro, leveraged and hedge funds are selling it, according to Nomura Holdings Inc. The options market also suggested caution for bulls, with the premium one needs to pay to own euro upside having fallen this week.

“Positioning signals are mixed, but on balance they suggest the euro can still make meaningful gains,” Nomura strategists including Bilal Hafeez wrote in a note to clients.

The euro has climbed more than 6% versus the greenback this year, set for its biggest annual increase since 2007. It was at $1.1210 by 2.30pm London time on Thursday. Banks including Credit Agricole SA, UniCredit SpA and ING Groep NV have recently raised their forecasts for the currency, with ING targeting $1.20 by mid-2018.

That comes after it tumbled a total 23% in the past three years, leading German Chancellor Angela Merkel to say this month that the currency was “too weak” because of European Central Bank policy. It is more undervalued than any G-10 peer in terms of purchasing-power parity, according to data from the Organisation for Economic Co-operation and Development.

After the region’s struggle to emerge from the financial crisis, economic data is improving with recent euro-area manufacturing and retail sales beating analysts’ forecasts. Inflation is also picking up, though there is a divergence of views among ECB officials on when to start removing monetary stimulus. Centrist Emmanuel Macron’s victory in the French presidential elections against eurosceptic Marine Le Pen this month, and progress in Greek debt talks, have further spurred appetite for regional assets.

“We are already starting to see the euro moving in line with positive economic data surprises,” Morgan Stanley strategists including Hans Redeker said. “Stronger growth means a stronger euro.” Bloomberg

More From LiveMint

image beaconimage beaconimage beacon