Talking about European markets, it must be noted that it hasn’t been all doom and gloom.
The sharp declines seen in the euro against the dollar from early to mid-May were accompanied by an equally sharp pickup in the pace of inflows into German and French equities as investors reflected positively on the benefits that a weakening euro will have on the export-oriented sectors of their economies.
It has become clear that this less-expensive euro weighed considerably less on the minds of investors in southern European equities, who were more concerned about the likely negative economic impacts of their respective austerity programs.
Greece continued to see net continuous outflows from its equity market, as has been the case since October 2009, as did Portugal. Flows into Italian equities remained practically flat, as has been the case since the start of this year.
Although this clear-cut geographical split in equity investment flows (the EU south is considered “not so good and promising” while the EU north is considered “good with substantial export growth potential in selected parts of their economies”) is neither surprising nor particularly encouraging.
It is also true that during the past 12 trading days, we have seen the euro achieving some kind of stabilization. We did see some fresh euro selling in the week after the EU/IMF support package was announced, but since May 18 there has seen some fairly substantial euro buybacks.
Positioning is now back to the levels last seen in late January and early February, which is a clear indication that a significant number of investors have been preparing themselves through late May for a major rebound of the euro against the dollar.
The broader backdrop, however, remains that the reserve-management community of the emerging-market nations (which are those that report the split of their reserves to the IMF) continue to hold somewhere in the region of 30 percent of their holdings in the euro as the IMF COFER (Currency Composition of Foreign Exchange Reserves) reported at the end of 2009.
The IMF report also shows how their currency holdings have shifted and grown in the past decade.
This gives us an idea of the levels when the euro purchases were made, at around $1.2877.
China doesn’t provide the split on its reserve holdings. Because of the pattern of their reserve growth during the past decade, the average rate on their euro purchases must also be somewhere in that same upper part of the $1.20 range.
Nothing really extreme is going on so far.
The IMM (International Monetary Market) commitments of traders report also shows that the holdings of speculative players in euro-futures contracts hardly suggest extreme positioning.
The IMM says the market is euro short 40,411 contracts, which is close to the record short of 45,517 hit in early March. That said, it must also be remembered that this isn’t a particularly dramatic number when considered in the context of the past 11½ years since the euro entered the world.
The average position for that entire period was long euro around 21,000 contracts, with the net long position hitting a top of 105,705 contracts in May 2007.
Bottom line: Taking various positioning data available (including that from the IMM and the broader picture that emerges from the latest available IMF’s COFER report), it seems reasonable to conclude that the market isn’t as short on euros as many may think.
But investors shouldn’t get it wrong and should take notice. Taking into account that the recent rallies in the euro have been rather anemic, the flow data also suggest that the current euro may still have plenty of room to fall.
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