(Bloomberg) – Futures traders are more bearish than ever on the euro as Greece’s fiscal crisis spreads, suggesting further declines ahead for Europe’s shared currency.
Hedge funds and other large speculators raised net wagers on a euro drop by 25 percent to 89,013 contracts in the week ended April 27, Commodity Futures Trading Commission data shows. The euro was at $1.3316 at 8:53 a.m. in Sydney after falling to a one-year low of $1.3115 on April 28 as Standard & Poor’s lowered Greece’s debt to junk and cut Portugal and Spain.
While Greece accepted a bailout from the European Union and International Monetary Fund valued at 110 billion euros ($146 billion) to prevent default, futures market bets show traders expect any gains to be short-lived. The euro has depreciated 7 percent this year, including last week’s 0.7 percent loss, as growing concern that the sovereign debt crisis will slow Europe’s economy reduced confidence in a region whose $13.6 trillion gross domestic product is exceeded only by the U.S.
“Greece is a Lehman Brothers for the sovereign world,” Robin Marshall, who helps oversee $20 billion as director of fixed income at Smith & Williamson Asset Management in London, said yesterday. “A 100 billion euro package is a big amount and it might help to buy Greece some breathing space, but as an investor I’m still cautious. Policy makers can promise what they like, I still have doubts that the Greeks will have the stomach to take these tough measures.”
The extra yield that investors demand to hold Greek debt over German bunds surged to 826 basis points on April 28 after Standard & Poor’s cut its rating to junk. It eased to 594 points on April 30 as signs of an agreement emerged. The Portuguese spread jumped to the most since at least 1997 last week and the premium on Spain climbed to the highest since March 2009.
Relief Rally?
“I would expect a relief rally concentrated at the short end of the curve as the risk of a near-term debt restructuring will be substantially reduced,” said Marco Annunziata, chief economist at UniCredit Group in London. “Beyond the immediate impact, I still believe Portugal and Spain will need to put on a table stronger measures” to “avoid coming under renewed pressure in the coming weeks and months.”
Strategists have lowered euro targets on speculation that the region’s worsening government finances will keep the European Central Bank from raising interest rates this year, while futures traders bet the Federal Reserve will increase borrowing costs, making dollar-denominated assets relatively more appealing.
“The main risk flowing from the sovereign stress is that European banks will curtail credit to each other and to private borrowers in a way similar to the post-Lehman bankruptcy fallout,” Bruce Kasman, the chief economist at New York-based JPMorgan Chase & Co., wrote in an April 30 report.
Budget Measures
The budget measures Greece agreed to implement are worth 30 billion euros, or 13 percent of gross domestic product, and include wage cuts and a three-year freeze on pensions, Finance Minister George Papaconstantinou said in Athens. Greece’s main sales tax rate will rise to 23 percent from 21 percent.
Policy makers are trying to prevent a Greek default as its fiscal crisis shows signs of spreading through the euro region. The agreement, following 10 days of talks and protests, comes after a surge in Greek borrowing costs left the government struggling to finance its debt and investors speculating that Portugal and Spain may suffer the same fate.
‘Color Us Skeptical’
“It is difficult to see how the European/IMF package is scalable or how it really gets ahead of the curve of expectations or shows any appreciation for the fact that underlying the debt/deficit issues is really a competitive issue,” currency strategists at Brothers Harriman & Co. in New York, wrote in a note to clients on April 30. “So, there is a small reprieve, but color us skeptical about real closure.
The euro advanced in the final three days of last week on signs Greece may reach an agreement on budget cuts needed to win financial assistance.
Greece’s Prime Minister George Papandreou said April 30 that the nation’s survival was at stake in talks to win an EU-led bailout including budget cuts denounced by unions as “savage.” Signs of agreement on an accord ended a bond-market sell-off across Europe last week.
‘Grind Lower’
The shift in futures bets, topping the previous high set on April 2, may indicate that the euro gets a short-term reprieve as traders trim bearish positions.
“The euro will grind lower, unless we get really major additional bad news given that much is already priced in,” Geoffrey Yu, a strategist in London at UBS AG, said in an interview April 26. “It is going to be three steps down, two steps up for the euro for now but net, net in six months time we are going to see it lower.”
The euro’s one-month option risk-reversal rate increased to minus 1.6750 on April 30 from minus 1.9375 percent two days earlier, which was the lowest level since Nov. 4, 2008, signaling a relative decrease in demand for puts, which grant traders the right to sell the currency.
The bailout of Greece will allow the nation to borrow at lower rates than it can get in the bond market, which may improve investor sentiment, according to Thomas Sowanick, chief investment officer for Omnivest Group LLC, which manages $1 billion in Princeton, New Jersey.
Euro Support
“I am not negative the euro, even though I understand why it has been doing what it’s doing,” Sowanick said. “We need to be very respectful that the U.S. is not in too dissimilar of a position as far as having high levels of debt. The euro should find support.”
The median forecast of 32 strategists compiled by Bloomberg is for the currency to end the year at $1.31. In February, the estimate was $1.43. The range spans from $1.22 to $1.55.
U.S. GDP grew at a 3.2 percent annual rate in the first quarter as household spending climbed at the fastest pace in three years, figures from the Commerce Department in Washington showed April 3. America’s economy will likely expand 3 percent this year, compared with 1 percent for the EU, according to the median estimate of economists in separate surveys by Bloomberg.
Large speculative euro currency derivative positions were on average net long 17,349 contracts since the euro was formed in 1999, reaching a record 119,538 in May 2007, just before the collapse of the subprime mortgage market triggered a global financial crisis.
Trading volume in foreign-exchange products rose on April 28 to a record for Chicago-based CME Group Inc., the world’s largest futures market. Turnover in euro currency futures and options combined was an all-time high of 694,369 contracts, representing a notional value of $114.5 billion. That topped the previous high of 594,648 set on April 27.
–With assistance from Anchalee Worrachate in London, Candice Zachariahs in Sydney and Ben Levisohn in New York. Editors: Dave Liedtka, Garfield Reynolds.
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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