(The opinions expressed here are those of the author, a columnist for Reuters)
By Jamie McGeever
LONDON, Dec 18 (Reuters) - Hedge funds are taking a $16.7 billion gamble on a stronger euro, their biggest bet on the single currency in over a decade.
Data from the Chicago Futures Trading Commission show that hedge funds and speculative accounts ramped up their net long euro positions by nearly 21,000 contracts to 113,889 in the week to Dec. 12, a position worth just under $17 billion.
That was the most eye-catching part of a wider bet against the U.S. dollar in the week, as hedge funds underwent the biggest positioning shift against the greenback in almost three months.
The net long euro position is the second highest on record, only behind the 119,538 contracts registered in mid-May 2007.
In some respects, this degree of confidence in the euro is well-founded. The European economy has been one of the surprise success stories of 2017.
According to the European Commission, the European economy, the bulk of which comprises the 19 nations that use the euro, will grow 2.3 percent this year compared to the United States’ 2.2 percent. Remarkably, this will be the second consecutive year of European outperformance.
In this light, it is perhaps no surprise that the euro is up more than 12 percent on the dollar so far this year and on course for its best year against the U.S. currency since 2003.
The question now is: is this bullishness overdone?
Back in May 2007, hedge funds and speculators began scaling back their long positions. So much so that almost a year later they were net short of euros.
But the euro/dollar exchange rate rose further. It went from around $1.35 at the CFTC peak net long all the way through $1.60 by April 2008, just as global markets were about to come crashing down later that year.
Now, much depends on the relative paths of U.S. Fed and European Central Bank monetary policy. Traders are betting that the Fed won’t tighten too aggressively, while ECB president Mario Draghi struck a dovish tone at his news conference last week.
The CFTC data show that the value of hedge fund and speculators’ short dollar position rose by more than $3 billion in the latest week, a punt on the U.S. currency falling not seen since the end of September.
The overall net short dollar position against a range of major and emerging currencies now stands at just under $10 billion, the biggest since the end of October.
Hedge funds have been short the greenback every single week since the end of June, taking the view that there won’t be too many more increases in U.S. interest rates than the five already delivered by the Fed in its extraordinarily gradual tightening cycle.
It has been one of the few trends in currencies or rates markets to emerge in a year marked by historically low volatility across a range of assets that has limited trading opportunities and made it difficult to take directional bets.
The dollar is down more than 8 percent against a basket of major currencies so far this year, its worst year since 2007 and within a whisker of its biggest annual fall since 2003.
Earlier this month the U.S. yield curve, the gap between 10-year and two-year Treasury yields, narrowed to 50 basis points. That is the flattest in over a decade and, in the eyes of many observers, a sign that the growth outlook is pretty bleak.
The curve has started flattening again after a couple of weeks of respite, going hand in hand with the latest swing in speculative bets against the dollar. The 2/10 year curve now stands at just above 51 basis points.
The latest CFTC data for the week to Dec. 12 also showed that hedge funds increased their net long 10-year Treasury futures positions by more than 30,000 contracts.
That came after a week of unusually heavy selling that almost completely wiped out the net long position they have held since May.
Hedge fund and speculators have found returns in foreign exchange and rates markets hard to come by. The BarclayHedge macro fund index was up only 3.37 percent in the year through November, well down on the broader Barclay hedge fund index’s 8.97 percent return and Wall Street’s near 20 percent rise this year.
Underlying just how tough trading has been - or how spectacularly wrong hedge funds have judged markets this year - the BarclayHedge currency fund index is up a paltry 0.33 percent in the year through November.
Reporting by Jamie McGeever; Editing by Alison Williams