Investors are more pessimistic about the euro than they were in October 2020, as the coronavirus pandemic ravaged the world, according to Bank of New York Mellon data, amid a deteriorating economy and rising geopolitical risks.
The difference is that when the euro subsequently rebounds with the economic recovery, the bears end up losing money, but BNY Mellon strategist Daniel Tenengauzer believes that under the current situation, investors seem to be the right choice to short the euro.
BNY Mellon uses forward and exchange positions in its own database to simulate investor positions and currency profitability. It found that investors are currently shorting the euro against other major currencies, including the U.S. dollar, British pound and Swiss franc.
The euro has slumped sharply this year as the Russia-Ukraine war has pushed up energy, food prices and heightened geopolitical tensions, while fears of slowing economic growth have limited the European Central Bank’s ability to raise interest rates quickly and dented investor appetite for interest in euro assets.
After 11 years of default, the ECB finally announced a 2-yard rate hike last month. With inflation still stubbornly high, Bundesbank President Joachim Nagel on Friday called on the ECB to keep raising interest rates and warned German prices could rise by more than 10 percent in the coming months.
The euro against the dollar once depreciated to $0.9952 last month, the first time it fell below parity in 20 years. Although it rebounded later, it still fell more than 2% this week and continued to hover above $1. Meanwhile, commodity futures trading data showed leveraged funds were still building short positions in the euro.
Still, Tenengauzer believes that long dollar trades will far outperform euro shorts, while shorting the South African rand, the Thai baht and the Chinese yuan are the most profitable short trades.