Bets Versus Euro at Record as Traders See Past Greece (Update1)
By Liz Capo McCormick
May 3 (Bloomberg) -- Futures traders are more bearish thanever on the euro as Greece’s fiscal crisis spreads, suggestingfurther declines ahead for Europe’s shared currency.
Hedge funds and other large speculators raised net wagerson a euro drop by 25 percent to 89,013 contracts in the weekended April 27, Commodity Futures Trading Commission data shows.The euro dropped to $1.3233 at 11:08 a.m. in Singapore afterfalling to a one-year low of $1.3115 on April 28 as Standard &Poor’s lowered Greece’s debt to junk and cut Portugal and Spain.
While Greece accepted a bailout from the European Union andInternational Monetary Fund valued at 110 billion euros ($146billion) to prevent default, futures-market bets show tradersexpect any gains to be short-lived. The euro has depreciated 7.6percent this year, including last week’s 0.7 percent loss, asconcern the sovereign debt crisis will slow Europe’s economyreduced confidence in a region whose $13.6 trillion grossdomestic product is exceeded only by the U.S.
“Greece is a Lehman Brothers for the sovereign world,”Robin Marshall, who helps oversee $20 billion as director offixed income at Smith & Williamson Asset Management in London,said yesterday. “A 100 billion euro package is a big amount andit might help to buy Greece some breathing space, but as aninvestor I’m still cautious. Policy makers can promise what theylike, I still have doubts that the Greeks will have the stomachto take these tough measures.”
Extra Yield
The extra yield investors demand to hold Greek debt overGerman bunds surged to 826 basis points on April 28 afterStandard & Poor’s cut its rating to junk. It shrank to 594points April 30 as signs of an agreement emerged. The Portuguesespread jumped to the most since at least 1997 last week and thepremium on Spain climbed to the highest since March 2009.
“I would expect a relief rally concentrated at the shortend of the curve as the risk of a near-term debt restructuringwill be substantially reduced,” said Marco Annunziata, chiefeconomist at UniCredit Group in London. “Beyond the immediateimpact, I still believe Portugal and Spain will need to put on atable stronger measures” to “avoid coming under renewedpressure in the coming weeks and months.”
Strategists have lowered euro targets on speculation theregion’s worsening government finances will keep the EuropeanCentral Bank from raising interest rates this year, whilefutures traders bet the Federal Reserve will increase borrowingcosts, making dollar-denominated assets more appealing.
‘Main Risk’
“The main risk flowing from the sovereign stress is thatEuropean banks will curtail credit to each other and to privateborrowers in a way similar to the post-Lehman bankruptcyfallout,” Bruce Kasman, the chief economist at New York-basedJPMorgan Chase & Co., wrote in an April 30 report.
The budget measures Greece agreed to implement are worth 30billion euros, or 13 percent of gross domestic product, andinclude wage cuts and a three-year freeze on pensions, FinanceMinister George Papaconstantinou said in Athens. Greece’s mainsales tax rate will rise to 23 percent from 21 percent.
Policy makers are trying to prevent a Greek default as itsfiscal crisis shows signs of spreading through the euro region.The agreement, following 10 days of talks and protests, comesafter a surge in Greek borrowing costs left the governmentstruggling to finance its debt and investors speculating thatPortugal and Spain may suffer the same fate.
‘Color Us Skeptical’
“It is difficult to see how the European/IMF package isscalable or how it really gets ahead of the curve ofexpectations or shows any appreciation for the fact thatunderlying the debt/deficit issues is really a competitiveissue,” currency strategists at Brothers Harriman & Co. in NewYork, wrote in a note to clients on April 30. “There is a smallreprieve, but color us skeptical about real closure.
The euro advanced in the final three days of last week onsigns Greece may reach an agreement on budget cuts needed to winfinancial assistance.
Greece’s Prime Minister George Papandreou said April 30 thatthe nation’s survival was at stake in talks to win an EU-ledbailout including budget cuts denounced by unions as “savage.”Signs of agreement on an accord ended a bond-market sell-offacross Europe last week.
‘Grind Lower’
The shift in futures bets, topping the previous high set onApril 2, may indicate the euro gets a short-term reprieve astraders trim bearish positions.
“The euro will grind lower, unless we get really majoradditional bad news given that much is already priced in,”Geoffrey Yu, a strategist in London at UBS AG, said in aninterview April 26. “It is going to be three steps down, twosteps up for the euro for now but net, net in six months time weare going to see it lower.”
The euro’s one-month option risk-reversal rate increased tominus 1.7050 today from minus 1.9375 percent two days earlier,which was the lowest level since Nov. 4, 2008, signaling arelative decrease in demand for puts, which grant traders theright to sell the currency.
The bailout of Greece will allow the nation to borrow atlower rates than it can get in the bond market, which mayimprove investor sentiment, according to Thomas Sowanick, chiefinvestment officer for Omnivest Group LLC, which manages $1billion in Princeton, New Jersey.
‘Not Negative’
“I am not negative the euro, even though I understand whyit has been doing what it’s doing,” Sowanick said. “We need tobe very respectful that the U.S. is not in too dissimilar of aposition as far as having high levels of debt. The euro shouldfind support.”
The median forecast of 32 strategists compiled by Bloombergis for the currency to end the year at $1.31. In February, theestimate was $1.43. The range spans from $1.22 to $1.55.
ECB policy makers will keep their target rate unchanged at1 percent through at least the end of this year, according tothe median estimate of economists surveyed by Bloomberg News.The Fed’s target rate for overnight loans between banks, whichhas held in a range of zero to 0.25 percent since December 2008,may rise to 0.75 percent, a separate survey shows.
U.S. GDP grew at a 3.2 percent annual rate in the firstquarter as household spending climbed at the fastest pace inthree years, figures from the Commerce Department in Washingtonshowed April 3. America’s economy will likely expand 3 percentthis year, compared with 1 percent for the EU, according to themedian estimate of economists in separate surveys by Bloomberg.
Large speculative euro currency derivative positions wereon average net long 17,349 contracts since the euro was formedin 1999, reaching a record 119,538 in May 2007, just before thecollapse of the subprime mortgage market triggered a globalfinancial crisis.
The trading volume of foreign-exchange products rose onApril 28 to a record for Chicago-based CME Group Inc., theworld’s largest futures market. Turnover in euro currencyfutures and options combined was an all-time high of 694,369contracts, representing a notional value of $114.5 billion. Thattopped the previous high of 594,648 set on April 27.
