© Reuters. The euro offsets the global challenge for the dollar’s currency crown
(Bloomberg) – Europe’s revitalizing single currency looks set to make people talk about ‘King Euro’.
The currency has risen more than 10% since the virus turmoil shook world markets in March, plunged by the EU’s political response to the crisis, and as US base rate yields weaken the dollar. Hedge funds are now betting another leap higher at $ 1.25 after the US election, with options seeing the most bullish August on record.
It’s part of a broader trend that has given Mizuho International strategists the title of king of currencies in the euro – a recognition usually reserved for greenbacks – as uncertainty surrounding November’s US presidential vote helps fuel the appeal of European assets further.
While the dollar typically wins in the months following the election results, a victory for President Donald Trump’s challenger Joe Biden could hurt that currency next year, as the Democratic nominee has called for increasing taxes on wealthy Americans and increasing federal spending to spur an American economy that is struck by the pandemic. Biden is leading the polls.
“Building expectations for a democratic sweep has probably played a role in weakening the dollar and strengthening the euro,” said Lee Hardman, currency strategist at MUFG Bank Ltd. in London. “Whether it continues ahead of the election will depend on whether the race is tightened or not.”
Of course, other factors will also determine the future of the euro, not least the extent to which the region’s growth surpasses that of the United States and how well both sides of the Atlantic manage to control the continued spread of coronavirus.
The Federal Reserve’s position is also in focus, with President Jerome Powell announcing Thursday that politicians will let inflation run higher. That’s a shift negative for the greenback, according to Jim Caron, portfolio manager at Global Fixed Income Morgan Stanley (NYSE 🙂 Investment Management.
Still, forecasts for market movements after a choice are more of an art than a science. Either way, the vote is now the most important event on the traders’ horizons. Option markets show investors bracing for turbulence in the pair three months from now to then see volatility cool down gradually.
This does not prevent hedge funds from playing the euro will trade above $ 1.25 after the election, according to traders and brokers in Europe familiar with the transactions, who asked not to be identified because they are not authorized to speak in public .
Renewed optimism about the euro’s outlook is also reflected in options trades that have gone through the Depository Trust & Clearing Corporation this month. August has seen the largest demand for exposure to euro gains since Bloomberg began collecting data, twice the volume of bets on a downturn.
“The US election has probably been a dollar-negative story, insofar as a democracy-led government could be associated with higher regulation and more taxation,” said Jane Foley, head of currency strategy at Rabobank in London, consistently a top advocate at Bloomberg locations. “The euro could benefit from this by default – and probably already has.”
Some investors place significant bets for an even bigger rise to $ 1.28 next year. That would be an 8% increase from current levels and take it to its highest level since 2014. Other market positioning and sentiment indicators over the next two years flash the level of bullishness for the euro, seen only a few times in more than a decade .
Analysts still say that the Biden effect has already been priced in the short term. While MUFG predicts that the euro will end the year up around 1.5% to $ 1.20, it recently tactically suggested selling the euro against the dollar and expecting a correction after the sharp gains of the single currency. The median forecast in a Bloomberg survey sees the euro at $ 1.18 in both the third and fourth quarters of 2020, slightly changed from its current level.
The euro rally could stop or retreat if Trump wins another term, reveals regulation and delivers business-friendly policies. There may also be bad news if the virus leads to renewed shutdowns in Europe and weak economic data.
But it’s an increasingly niche show. Regardless of the election in the US, Standard Bank’s head of currency strategy, Steven Barrow, sees the euro climb to $ 1.25 in six months. That would take it back to levels seen in early 2018, before two years of steady declines shook faith in those calling for an end to US dollar hegemony.
“My view is that the dollar is going down, and it does not matter who wins,” Barrow said. Countries like the US have developed these huge deficits on the current items that require the inflow of capital and the US will stretch it further. US assets may be overvalued. ”
And on the euro side, the agreement between EU leaders on a recovery fund has strengthened the credibility of the single currency. It followed a myriad of political problems that made investors question whether the bloc could stay together, from Brexit to Italy’s budget battles with the EU and pressure on the leaders of France and Germany.
Now the euro is growing as a haven, according to Peter Chatwell, head of the multi-asset strategy at Mizuho. The gains of the euro have surpassed the other traditionally safe currencies, and.
“There’s plenty of time for the ‘King Euro’ theme to run,” Chatwell said. “It can compete with the dollar to be the Western currency chosen for trading purposes, and can compete more generally with other currencies in safe harbor as a credible, long-term capital stock.”