Managers boost bets against euro

Managers are increasing their bets against the euro and forecasting falls of up to 20% in the single currency, even as the ECB continues to tighten monetary policy.

Dale Thomas, manager of the £386m Absolute Insight Currency fund, said the euro is the focus of the fund’s largest short position, accounting for between 10% and 30% of NAV. Thomas is short the euro versus sterling and has initiated a short position in the single currency versus the Swedish krona.

“The eurozone economy is slowing rapidly at the same time that other economies – particularly in the US – are going to outperform”, he said.

“The periphery slowing will continue to weigh on the euro.”

The ECB hiked rates for the second time this year on 7 July, from 1.25% to 1.5%, and president Jean-Claude Trichet implied a further hike is still possible in the coming months. The euro has risen almost 10% against the dollar this year as investors factor in this tightening cycle.

Yet Stuart Frost, co-manager of the RWC Enhanced Absolute Rate and Currency fund, said tighter monetary policy will provide only “temporary strength for the euro” and noted the interest rate differential between the euro and the dollar remains muted.

“We believe the euro is overvalued relative to both the dollar and sterling, and pretty much any other major currency”, said Robin McDonald, multi-manager at Cazenove.

McDonald and head of multi-manager Marcus Brookes have a position in a long dollar, short euro ETF in their £587m Cazenove Multi-Manager Diversity fund.

“I see no reason why the euro could not trade down to 1.20 versus the dollar”, McDonald said. That would represent a fall of 15% from the 7 July level, when the euro was trading at 1.44 dollars.

Others believe the best way to play the weakness will be through other currencies aside from the dollar. Guy Stern, head of multi-asset at Standard Life Investments, agreed the euro is “too expensive and vulnerable to the regional peripheral crisis”.

SLI’s £8bn Global Absolute Return Strategies fund has initiated a short euro, long Norwegian krone pair trade to play on the trend.

Frost, meanwhile, forecasts the euro will reach record lows against the Swiss currency over the next year.

“The euro can fall as low as 1.15 per Swiss franc and possibly reach parity on a 12-month view,” he said.

With the Swiss franc buying 1.22 euros earlier on 7 July, reaching parity would represent a fall of 18% in the value of the euro.

Frost sees euro-dollar is "an overcrowded trade" and said he will look again at exploiting weakness via the Swedish currency. Both he and Insight's Thomas emphasised the need to tread carefully in selecting his trades, given the way that currencies such as the krona and the Swiss franc tend to be correlated to risk appetite.

Thanos Papasavvas, head of currency management at Investec, provided a dissenting voice. He said the single currency is fairly valued and suggests it will continue to strengthen, suggesting policymakers are "learning how to deal with the sovereign debt crisis".

If there is a consensus, it is that volatility will continue until markets get clearer confirmation of where the major economies are heading. "The change of mood we're seeing in currency markets can be quite brutal", Thomas said.

"The big moves in currencies seen over the past few years suggest that when such events do happen, they could result in a 10%-20% move in a currency within a quarter," agreed McDonald.