Most Bearish Euro Bets Since 2016 Could Mark Low for Currency

(Bloomberg) -- The build-up of market bets against the euro might signal the prospect of a tentative recovery for the struggling currency.

Hedge funds and other speculators increased bearish positions on the euro to the most since December 2016, the latest data from the Commodity Futures Trading Commission show. With net shorts at 78,166 contracts in the week through March 5, it might be time to reassess whether this could translate into more losses or if most of the negatives are already in the price, according to Valentin Marinov, the head of currency strategy at Credit Agricole SA.

Most Bearish Euro Bets Since 2016 Could Mark Low for Currency

“Excessive market shorts do highlight that we may be getting closer to a turning point,” London-based Marinov said. “To have a real turnaround in the euro, however, we would need more tangible evidence of an economic turnaround in the euro zone. Calling the bottom of the latest euro selloff has proved to be very challenging.”

The currency has declined 2 percent against the dollar since the start of the year, as the region’s economic data took a turn for the worse and prompted the European Central Bank to announce more easing and back away from normalizing policy.

The euro was at $1.1242 at 2:40 p.m. in London on Monday. The shared currency is seen climbing to $1.18 by the end of the year in a Bloomberg survey, while Credit Agricole sees it reaching $1.20. Risk reversals, a gauge of positioning and sentiment in the options market, are still in favor of euro puts both in the short term and over one year.

The ECB’s measures could help stabilize the region’s outlook and “offset the headwinds to growth coming from abroad,” Marinov said. “Political risks associated with Brexit and the EU parliament elections will start subsiding in the next three months.”

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