Reuters. Hedge funds are betting that the euro will rise to $1.25 after the U.S. election.

(Bloomberg)

Hedge funds are becoming more bullish on the euro. Not only are they betting that the currency’s rally will continue, but they think it will rise to levels last seen in early 2018.

Interest in buying options to prepay another 5 percent in euros over the next six months is strong, according to two traders and a broker in London who are familiar with such trades. As of 10:44 a.m. in London, the euro was trading little changed at $1.1836.

The chances of a Democratic victory, and what that means for the U.S. fiscal plan, is one of the main drivers of dollar weakness, added the traders, who asked not to be identified because they are not authorized to speak publicly.

It’s not just hedge funds. The bullishness on the euro has lifted risk reversals across maturities to between 60 and 80 basis points, a phenomenon that has occurred only three times since Bloomberg began compiling data in 2006. In all cases, the euro has rallied more than 5% in a few months.

And that conviction in the euro’s long-term strength, despite the euro’s biggest decline against the dollar in more than four months on Wednesday, has barely wavered on the risk reversal a month later on deadline. While the common currency still benefits from the misfortune of the dollar, it is also riding high on optimism about the fiscal and monetary union exhibited by the eurozone.

Options trading data from the Depository Trust & Clearing Corporation passing through this month showed a strong preference for the euro to be bullish rather than bearish. Some even bought structures that would pay if the euro rose to $1.28. That’s an 8 percent increase from current levels and the highest since 2014.

Economic data from the U.S. and the European Union due to be released on Friday could be the driving force behind the euro and the dollar.

  • Note: Vassilis Karamanis is a forex and interest rate strategist who writes for Bloomberg. His observations are his own and are not intended as investment advice.

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2020-08-20