Euro Bears Look to Be Right as Futures Show Shift

The stars are finally aligning for euro bears.

Firms from Morgan Stanley to Bank of America Corp. that for almost a year called for weakness in the 18-nation currency, only to see it soar to the highest level since 2011, say they’re about to be vindicated.

Fresh evidence of lower demand for the region’s bonds, combined with a potential European Central Bank interest-rate cut in as soon as two weeks, are only serving to push the euro lower, they say. Looming European Parliament elections that may expose rifts over government austerity measures are also seen weighing on the currency.

“The change has finally started to take place,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said in a May 19 phone interview. “When we see easing measures, it’s not just the initial impact of a potential rate cut, it’s going to be the asset market performance to those easing measures which will be the key to the euro.”

Morgan Stanley predicts the common currency will tumble 12 percent to $1.20 by September 2015 from $1.3654 at 12:24 p.m. in New York. Bank of America sees it dropping to its 2013 low of $1.2746. The median estimate of about 90 economists and analysts is for the euro to end the year at $1.32.

Warning Signs

The bears have reason to be optimistic. Since reaching a 2 1/2-year high of $1.3993 on May 8, the euro dropped 2.4 percent as ECB President Mario Draghi said the same day that he was comfortable with easing monetary policy further at the next meeting on June 5. He also said the currency’s gain is hurting the central bank’s effort to boost consumer prices.

Some 47 economists in a Bloomberg survey see cuts in the ECB’s benchmark, currently 0.25 percent, and the deposit rate, which is zero. That would make the ECB the first major central bank to charge lenders for parking cash with it overnight.

Lower rates tend to diminish the allure of a currency, and asset managers are already beginning to sound cautious.

New York-based BlackRock Inc., the world’s biggest money manager, said on May 8 it cut its holdings of Portuguese debt. Japanese investors sold 1.96 trillion yen ($19.3 billion) of euro-denominated long-term debt securities in March, finance ministry data show.

‘Conviction’ Trade

Nader Naeimi, who helps oversee more than A$30 billion ($27.8 billion) at AMP Capital Investors Ltd., said May 20 from Sydney that in the last two months he boosted his positions in trades that would profit from a lower euro. Selling the currency is “one of the highest-conviction positions,” he said.

Italy’s 10-year bonds are poised for the biggest monthly decline since June, after yields dropped to 2.89 percent on May 15, the lowest since at least 1993. Spanish yields have risen 17 basis points since falling to a record 2.83 percent on the same day. Bond yields in euro countries from Spain to Greece had plunged since Draghi said in 2012 he would do whatever it took to keep the euro from breaking apart amid the region’s debt crisis.

“Risk premium compression has largely run its course, leaving the liquidity channel to dominate,” Robin Brooks, the New York-based chief currency strategist at Goldman Sachs Group Inc., said in an e-mail on May 16.

Goldman Sachs, which correctly forecast the euro’s ascent last year, saying in December 2012 it would rise to $1.33 and in September calling for a jump to $1.38, now predicts a 5 percent drop to $1.30 in the next 12 months.

Euro Outlier

The New York-based firm was an outlier. Since the euro began its 8.3 percent rally in July to its May high, strategists have repeatedly called for a reversal, based on the risk of disinflation and economic growth that trails the U.S., U.K. and even Japan.

In September, they saw it ending 2013 at $1.31, only to see a rise to $1.3743. Three months later, the consensus was for it to weaken to $1.32 by the end of the first quarter 2014. Instead, capital inflows and a current-account surplus combined to support the currency.

To Citigroup Inc., it takes more than short-term investors to initiate a downtrend in the euro. The world’s biggest currency trader predicts a drop to $1.36 by the end of the year and trade at around that level until June 2015.

“The longer-term investors haven’t really adjusted their portfolio flows by a huge amount -- they look for actual confirmation there’s a change,” Richard Cochinos, the head of Americas Group of 10 currency strategy at Citigroup, said in a phone interview on May 16. “To a large extent the short-term community is definitely positioning, looking for downside.”

Bearish Futures

Futures traders have turned bearish on the shared currency for the first time in three months. The difference in the number of wagers on a decline in the euro by hedge-fund managers and other large speculators compared with those on a rise, known as net shorts, totaled 2,175 contracts on May 13, down from a net-long position of 32,551 contracts a week earlier.

Adding to pressure on the euro is a selloff in debt from the region amid concern European Union Parliament elections starting this weekend will spur a voter backlash against austerity measures put in place since the global financial crisis.

‘Not Helping’

Greece’s main opposition party Syriza’s leader Alexis Tsipras has billed the vote as a referendum as he seeks support for plans to scrap austerity measures attached to the country’s 240 billion-euro ($328 million) international bailout. Polls show falling representation by Europe’s Christian Democrats and Socialists, the largest groups in the outgoing assembly.

The potential fallout from the elections are “not helping the euro’s cause,” Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview yesterday.

Investors should sell the common currency at $1.3735, around the 100-day moving average, and target a 7 percent drop to as low as $1.2685, about last year’s lowest levels, Bank of America technical strategist MacNeil Curry said in an e-mail on May 15.

“It’s time to sell euro-dollar,” said Curry. “The combination of deteriorating European assets and poor price action say the trend has turned.”

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