Hedge Funds Bet the Euro Will Rise to $1.25 After U.S. Elections
Hedge Funds Bet the Euro Will Rise to $1.25 After U.S. Elections
(Bloomberg) --
Hedge funds are becoming even more bullish on the euro. Not only are they betting the currency’s rally will continue, they see it rising to a level last seen in early 2018.
Interest to buy euro options that payout on another 5% advance over the next six-months is strong, according to two traders and a broker in London, all of whom are familiar with the transactions. The euro traded up 0.1% at $1.1845 as of 1:29 p.m. in London.
The chances of a Democratic Party win, and what that means to U.S. fiscal plans, are among the main drivers of the dollar’s weakness, the traders added, asking not to be identified because they aren’t authorized to speak publicly.
It isn’t just hedge funds. Bullishness on the euro has lifted risk reversals across tenors to between 60 to 80 basis points, a phenomena that’s only happened three times since Bloomberg began compiling the data in 2006. In all cases, the euro rallied by more than 5% within a few months.
And such is the conviction in the euro’s long-term strength that, despite falling against the dollar on Wednesday by the most in more than four months, risk reversals hardly budged on tenors one-month out. While the common currency is still benefiting from the dollar’s misfortunes, it’s also riding high on optimism over the fiscal and monetary union shown in the euro area.
Data from the Depository Trust & Clearing Corporation for options trades that went through this month show a strong preference for euro calls instead of puts. Some are even buying structures that pay out if the euro advances to $1.28. That’s an 8% increase from current levels, and the highest since 2014.
Options also show that optimism for the euro isn’t as high as it is for the traditional currency havens, the Japanese yen and the Swiss franc in the long term. In a sign that the European Union’s fiscal and monetary response to the pandemic has boosted the outlook for the common currency but isn’t enough to grant it haven status, options traders remain wary of downside risks into 2021.
For the short-term however, economic data out of the U.S. and the European Union due Friday could be drivers for both the euro and the dollar.
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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