“The euro put in a low on May 29 a little above $1.15. That is nearly a 10.5 cent decline since the three-year high was set in mid-February,” note BBH analysts and add: “The thing that is difficult for investors and analysts to get their head around is that the speculators in the futures market, who as seen as proxies for trend-followers and momentum traders, continue to carry large euro exposure.”
Key quotes
“Too many observers mistakenly focus on the net positions in the futures market. Since late-April, the net speculative long position has been trimmed by a little more than a third (from 151k to 93k contracts). It has fallen for six consecutive weeks and now is at the low for the year. The net position is an abstraction. No one puts on a net position. One is either long or short. The net position combines the two. The gross shorts are vulnerable to a rally, and the gross longs are vulnerable to a sell-off.”
“There is another source of selling that may be weighing on the euro, but not being picked up in the futures positioning. Japanese institutional investors had been strong buyers of European bonds. Now it looks like they are boosting hedge ratios. This seems vaguely similar to the pattern involving the dollar. An under-appreciated factor that drove the dollar higher against the yen was international diversification of the Government Pension Investment Fund (GPIF) and other pension funds. The one-year dollar decline beginning in mid-2015 seemed to correspond to the hedging operations associated with the newly acquired dollar assets.”
“Reports suggest that Japanese life insurers have been boosting their euro hedge ratios. It is hard to find timely data, but the earnings reports contained such nuggets that cover the period through March. The hedge ratio appears to rise to 76% as of March 2018 from 71% at the end of September 2017. The life insurers are believed to have around JPY11 trillion of euro-denominated bonds. A 5% increase in the hedge ratio would entail the selling of 550 bln euros. “
“The euro fell to JPY124.60 last week. That is the lowest it has been since mid-2017. The euro’s pullback after reaching JPY137.50 in early February stopped shy of the 50% retracement (~JPY123.55). It is trading higher for the fourth consecutive session. The JPY128.80-JPY129.50 area may slow the recovery.”
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