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The ECB’s Rates Allow Hedge Funds to Stockpile Euro 

The European Central Bank looks to be on track to begin hiking interest rates next month; allowing hedge funds to stockpile euros. That’s precisely what they’re doing.

According to data from the US futures market, speculators had their largest net long euro position in 12 weeks, and May was the second-most favorable month-over-month improvement in positioning in almost two years. According to the latest Commodity Futures Trading Commission data, funds raised their net-long euro holdings by about $2 billion in the previous week; accounting for two-thirds of a $3 billion drop in the broader long-dollar position versus G10 currencies.

The $5 billion drop in net-long dollar bets versus G10 currencies over the last two weeks is entirely attributable to a $5 billion increase in net-long euro positions. From 38,930 contracts the week before, CFTC funds lifted their net-long euro position to 52,272 contracts, a three-month high. Their wager on the euro gaining value has increased to $7 billion, up from $5.2 billion a week ago. A long position in an asset or security is essentially a wager that it will appreciate, whereas a short one is an inverse.

How Much Rate Increase to Expect?

The ECB’s expectations have shifted dramatically. Only a month ago, CFTC funds had a tiny net-short euro position, the euro had dropped to $1.0350 in mid-May, and talk of parity with the dollar was rampant. However, eurozone inflation continues to rise, reaching a new high of 8.1 percent in May. Now, the question is not if the ECB will hike rates for the first time in nearly a decade in July, but by how much. Several ECB officials have suggested a 50-bps boost. Deutsche Bank (ETR: DBKGn) economists now expect one of two rate hikes in the third quarter to be a 50-bps hike, with September being more likely than July.

On Thursday, the European Central Bank should lay out its plans for a rate hike in July. The euro has recovered to a one-month high near $1.08, with money markets pricing in 100 basis points of rate rises by October and 125 basis points by the end of the year.

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