Investors ramp up bets against euro as energy crisis intensifies

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Investors’ bets that the euro will fall in value have reached their highest level since the pandemic hit Europe more than two years ago, as the risk increases that record energy prices will drag the region into recession.

Rising bets against the euro also reflect the bullishness of the US dollar, fueled by signals from the US Federal Reserve – reinforced Friday by its chairman Jay Powell – that it will continue to raise interest rates to tackle rising inflation. , even with a delay.

In addition to the threat of a recession, Europe is also struggling with soaring prices. At the annual meeting of central bankers in Jackson Hole this weekend, Isabel Schnabel, a member of the European Central Bank’s Governing Council, and François Villeroy de Galhau, France’s central bank governor, warned that monetary policy in Europe would have to be tight for an extended period of time. stay.

Speculators built net short positions on the euro — a way of betting that the currency will fall in value — from 44,100 contracts in the week to Aug. 23, up from 42,800 the week before, according to data released Friday by the Commodity Futures Trading Commission. have been published.

It marks the largest bearish position against the euro since the start of the pandemic in the first week of March 2020, when investors held net short positions of 86,700 contracts as the euro-zone economy plunged into a record post-war contraction.

The euro has already fallen 15 percent and has fallen below the dollar’s value in the past year. It hit a 20-year low last week as wholesale gas and electricity prices in Europe soared to unprecedented heights amid fears that Russia would throttle its crucial energy supply.

“The euro is purely a function of the European energy shock at the moment,” said Mark McCormick, Global Head of FX Strategy at TD Securities. “The biggest driver for the coming weeks has to do with what is happening with [the] Nord Stream 1 [pipeline from Russia] and increased gas prices.”

He said TD had started short euro trading when it traded at $103.45 and took profits after falling to parity against the dollar recently. “There is some room that could push the euro down. . . the short-term setup isn’t great,” he said.

Rising natural gas prices have prompted investors to reassess how long inflation could remain high and how hard it could hit the eurozone economy, as sectors from fertilizer production to glass production warn that high gas prices are limiting production.

David Adams, head of G10 FX strategy at Morgan Stanley, said rising bets against the euro also reflected the dollar’s role as “a safe haven in a storm”, as well as the fact that the US is not as exposed to the gas crisis.

The weak euro is fueling inflation, pushing up the price of imports, including energy. Economists expect euro-zone consumer prices to rise by a record 9 percent in the period through August, when the latest data is released on Wednesday.

Some ECB policymakers have suggested increasing the rate at which they raise interest rates to curb inflation, saying it should consider a 0.75 percentage point increase at its September 8 meeting, while Schnabel told Jackson Hole that a greater “sacrifice” will be needed to reduce inflation. contain inflation than during previous periods of monetary policy tightening.

One risk for investors betting against the euro is that the long-standing “flow of money” away from Europe to invest in the US and other regions could reverse in the next six to 12 months if the ECB raises interest rates. making euro-zone bonds more attractive, he said. Adams.

“The relative attractiveness of holding European paper is increasing,” he said, adding that for European investors, the long-term return on investments in eurozone government bonds could soon exceed that of US equivalents, net of hedging costs. against currency movements.

However, Jane Foley, head of FX strategy at Rabobank, said that “investors’ views on the euro are increasingly aligned with where the market is on sterling” as traders look beyond the expected rate hikes and instead focus on the bleak outlook for the eurozone and the UK.

“The market’s fear is that this isn’t about one tough winter, it could even take at least two years,” she said. “[The euro] cannot gain upward traction despite the fact that the market expects these rate hikes.”