Column-ECB Rates Pledge Spurs Punchy Hedge Fund Euro Bets: McGeever

The European Central Bank appears committed to start raising interest rates next month, opening the door for hedge funds to load up on euros. And that is exactly what they are doing.

U.S. futures market data shows speculators are holding their biggest net-long euro position in 12 weeks, and that May marked funds' second-most positive month-on-month change in positioning in nearly two years.

The latest Commodity Futures Trading Commission report shows that funds increased their net-long euro holdings by around $2 billion in the last week, accounting for two-thirds of a $3 billion fall in the broader long-dollar position against G10 currencies.

Indeed, the $5 billion decline in the net-long dollar position against G10 currencies in the past two weeks is entirely due to a corresponding $5 billion jump in net-long euro positions.

In the week to May 31, CFTC funds increased their net-long euro position to a three-month high of 52,272 contracts from the previous week's 38,930. Their bet on the euro appreciating is now worth $7 billion, up from $5.2 billion a week earlier.

A long position in an asset or security is effectively a bet that it will rise in value, and a short position is the opposite.

Graphic: CFTC euro position - $ value -

Graphic: CFTC euro positions - monthly change -

ECB EYEING 50 BPS HIKE?

The shift in ECB expectations has been remarkable. Only a month ago, CFTC funds held a small net-short euro position, the euro slumped as low as $1.0350 in mid-May, and talk of parity with the dollar was rife.

But euro zone inflation continues to march higher - it hit a record 8.1% in May - and the debate is no longer whether the ECB will raise rates in July for the first time in over a decade, but by how much.

Graphic: Euro FX rate vs dollar -

Several ECB officials have floated the possibility of a 50 basis-point move, and Deutsche Bank economists now expect one of two rate hikes in the third quarter to be a 50-bps hike, more likely in September than July.

"We wonder why the ECB has not acted already," Societe Generale economists wrote on Friday.

The ECB is expected to outline on Thursday the path toward a rate rise in July. Euro money markets are pricing in 100 bps of rate hikes by October and 125 bps by year-end, and the euro has rebounded to a one-month high close to $1.08.

Foreign-exchange market participants are paying heed to the ECB's inflation-fighting talk, and pushing to the back of mind the bank's 2008 and 2011 rate hikes, which many analysts say were major policy errors.

For now, at least, hedge funds are on board too.

Related columns:

Hedge funds position for U.S. growth slump, rates peak (May 23)

Yellen could face G7 pressure on dollar (May 18)

(The opinions expressed here are those of the author, a columnist for Reuters)

(By Jamie McGeever in Orlando, Fla.; Graphics by Jamie McGeever and Saikat Chatterjee; Editing by Matthew Lewis)