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Investors Jump Back Into the Euro as Going Short Proves ‘Lethal’

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  • Investors Jump Back Into the Euro as Going Short Proves ‘Lethal’

Hedge funds. Asset managers. Central banks. These are just some of the players in the $5.1 trillion-a-day currency market who are buying the euro after shunning it over the past three years.

The shared currency has snapped its losing streak to become the best performer among Group-of-10 peers in 2017. After plunging to a 14-year low in January, the currency has staged a stunning comeback, rising to $1.1910 on Aug. 2, a level not seen since January 2015.

“To be short euros here is absolutely lethal,” said Ulf Lindahl, chief executive officer of A.G. Bisset Associates, who manages about $1 billion from Norwalk, Connecticut. He expects the currency to rise to $1.30 by the end of the year, if not sooner. Even after its 3.6 percent rally in July, investors and analysts are predicting further gains. So who’s buying euros, and why?

Hedge Funds

Hedge funds initially missed out on the euro rally by holding net-bearish bets until May before jumping in, according to data from the U.S. Commodity Futures Trading Commission. Since then, speculators have piled headlong into bullish bets, building up the biggest net-long position in six years.

Fast-money traders who use momentum and trend-following strategies were well positioned for the rally, said James Kwok, London-based head of currency management at Amundi SA, which manages about 1.3 trillion euros ($1.5 trillion).

The “euro has been suffering for quite a few years,” Kwok said. “The political risk has diminished a lot and the economic momentum is getting better, and so now is the time for the euro to get back from the undervaluation level.”

U.S. Investors

U.S. investors will “increasingly look overseas for returns,” spurring flows into euro-denominated investments, said Lee Ferridge, head of macro strategy for North America at State Street Global Markets in Boston. They’ll probably do so without hedging against a weaker dollar, which would boost profits earned abroad, he said.

“The biggest potential driver of equity inflows into Europe would be U.S. investors,” which would tend to support the euro, said Alessio de Longis, a New York-based money manager in OppenheimerFunds Inc.’s global multi-asset group. That’s because dollar-based investors would have to buy euros in order to settle stock trades in the common currency, he said.

Euro three-month risk reversals, a barometer of medium-term directional bias, remain staunchly positive, with euro calls at premium levels last seen in 2009.

European Investors

Rising confidence in the European economy recovery gives investors there a good reason to buy assets closer to home, bolstering the euro, State Street’s Ferridge said.

The euro has shaken off its status as a second fiddle as European growth and inflation recovered, while political risks subsided after the election of French President Emmanuel Macron, spurring bets that the European Central Bank will pare stimulus.

Local investments allow traders to sidestep currency risk from overseas bets, said Amundi’s Kwok. He sees the euro rising to a range of $1.20 to $1.25 for the rest of the year and is keeping a close eye on whether Macron can implement economic reforms.

At the same time, European corporations that earn revenue in U.S. dollars will look to hedge against any gains in the euro, said Lindahl at A.G. Bisset.

Central Banks

Reserve managers could be another key buyer of euros in the months ahead, according to Kwok and State Street’s Ferridge. Central banks have boosted the euro’s share of their holdings in recent quarters after reducing holdings in 2014 and 2015 when concerns about Greek debt and political turmoil diminished its appeal as a reserve currency.

While the outlook for Europe has stabilized, U.S. political drama has escalated. Against this backdrop, reserve managers may opt to rebuild their euro holdings, which would cause yet more strength for the currency.

“The whole European project looks to be on stronger footing politically,” Ferridge said. In the U.S., “we have an administration that’s pretty inexperienced politically, and I think the changes that we’ve seen in the administration, the uncertainty, it’s not going to sit will with reserve managers. The euro would be a beneficiary from that.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Naira

Naira Hits Five-Month Low Amid Dollar Demand Surge

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Naira to Dollar Exchange- Investors King Rate - Investors King

Nigeria’s naira extended its losing streak to a fifth consecutive day as it slipped to its weakest level since March despite the Central Bank of Nigeria’s (CBN) interventions.

The naira closed at 1,577.29 per dollar on Monday, down from Friday’s N1,563.8 per dollar on FMDQ.

This decline comes despite the CBN’s efforts to stabilize the currency by injecting $122.7 million through dollar sales into the market.

However, analysts argue that these amounts were insufficient to balance the robust domestic demand for the greenback.

“The CBN has been in the market selling $50 million from time to time, which is not enough,” commented Carlo Morelli, senior portfolio manager at Azimut Investment SA.

Morelli attributes the persistent pressure on the naira to capital outflows and a lack of investor confidence in the currency, despite the central bank’s commendable efforts in tightening monetary policy and reducing naira liquidity.

Central Bank Governor Olayemi Cardoso has aggressively raised interest rates in an attempt to curb inflation and stabilize the naira.

The benchmark borrowing rate now stands at 26.25%, following an increase of 14.75 percentage points since May 2022.

However, the currency has weakened by approximately 70% against the dollar since exchange-rate controls were eased last year.

“Restoring foreign exchange broad confidence is the last step, and the huge volatility in May delayed the return to normalcy,” Morelli added.

“Many foreign investors are still waiting for more evidence of stability before considering Nigeria investable.”

The naira’s decline makes it the second-worst performing currency tracked by Bloomberg in 2024, trailing only the Lebanese pound.

The recent depreciation has been fueled by both seasonal dollar demand and ongoing investor skepticism.

The central bank’s next policy decision, set for July 23, is expected to address these issues. Monday’s data showing annual inflation quickened to 34.2% in June suggests that another rate hike might be on the horizon.

In a bid to bolster the naira, the central bank has increased Nigeria’s foreign exchange reserves to $35 billion as of July 8, the highest level since May 30, 2023.

This boost is attributed to recent loans from the World Bank and the African Export-Import Bank.

Omobola Adu, an analyst at BancTrust & Co. Investment Bank, noted that recent pressure on the naira has also stemmed from corporates and individuals preparing for foreign vacations.

“Boosting the supply of FX into the country remains crucial for the government to alleviate pressure on the naira,” Adu stated.

He suggested that a eurobond or local dollar bond sale later this year, along with increased support from multilateral institutions, could help shore up reserves.

Despite these challenges, Central Bank Governor Cardoso remains optimistic, asserting that the worst of the currency’s volatility is over.

He reiterated this sentiment on Thursday in Lagos, addressing business leaders and highlighting improvements in crude output and capital inflows as positive signs.

Nigeria, Africa’s largest crude producer, relies heavily on oil sales, which account for at least 80% of its export earnings.

The country’s combined crude oil and condensate output rose to 1.5 million barrels per day in June, the highest since February, according to the upstream petroleum regulatory commission.

“While the naira may be undervalued, for the naira to stabilize and perhaps regain ground, large portfolio and capital inflows are needed,” said Samir Gadio, head of Africa strategy at Standard Chartered Plc in London.

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Forex

Zimbabwe Urged to End Dollar Dependence, Boost Local Currency

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U.S dollar - Investors King

Zimbabwe must take decisive steps to reduce its reliance on the US dollar and promote the use of its own currency, according to Information Secretary Nick Mangwana.

In an opinion piece published in the Herald newspaper, Mangwana outlined the urgent need for de-dollarization to achieve economic sovereignty, stability, and growth.

“The benefits of de-dollarization far outweigh the costs, making it an urgent imperative for Zimbabwe to break free from the US dollar grip,” Mangwana asserted.

His call comes as more than 80% of the nation’s transactions are currently denominated in dollars, a situation exacerbated by the lifting of a ban on the US currency at the start of the coronavirus pandemic in March 2020.

This move was initially intended to ease an acute shortage of foreign exchange.

Mangwana said reducing reliance on the greenback is a critical step toward regaining economic control.

“De-dollarization will help promote our local currency and diversify the country’s reserves,” he said.

By encouraging the use of the Zimbabwean dollar, the country can work towards stabilizing its economy and fostering sustainable growth.

The push for de-dollarization is part of a broader economic strategy. Last week, President Emmerson Mnangagwa hinted that Zimbabwe’s bullion-backed Zimbabwean dollar (ZiG), its sixth attempt in 15 years to establish a stable currency, may become the sole legal tender before 2030.

This move is seen as a long-term solution to the ongoing currency instability.

Mangwana’s advocacy for de-dollarization reflects a growing consensus among government officials that economic independence is vital for Zimbabwe’s future.

“Reducing our dependence on the US dollar will not be without challenges, but the long-term benefits are undeniable,” he said.

The transition to a more self-reliant economic model is expected to involve significant policy changes and strategic planning to ensure a smooth and effective implementation.

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Forex

Nigeria’s Foreign Reserves Rebound to $35.05bn Under Tinubu Administration

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Forex Weekly Outlook March 6 - 10

Nigeria’s foreign reserves climbed to $35.05 billion as of Monday, according to the latest data from the Central Bank of Nigeria (CBN).

This represents a significant recovery to levels not seen since the early days of President Bola Tinubu’s administration.

The current reserve level represents a return to the $35 billion mark last recorded on June 2, 2023, when it stood at $35.02 billion. A day after President Tinubu’s inauguration, the reserves were reported at $35.09 billion.

Since then, Nigeria’s foreign reserves have fluctuated, frequently falling below the $35 billion threshold.

The reserves dipped to a low of $32.11 billion on April 19, prompting speculation about the CBN’s intervention in the currency market to support the naira.

The naira, which was officially floated on June 14, has lost approximately 70 percent of its value against the US dollar since the market segments were harmonized.

Despite these challenges, the recent rise in reserves indicates a positive trend. In response to concerns about market intervention, CBN Governor Dr. Olayemi Cardoso said the apex bank is committed to a market-driven approach.

“We encourage a willing buyer, willing seller dynamic and aim for minimal central bank intervention, except in very unusual circumstances,” he said during the last IMF Spring meeting.

The Monetary Policy Committee (MPC) of the CBN has also highlighted the importance of improving liquidity in the foreign exchange market.

Personal statements from the committee’s 295th meeting in May, recently published on the CBN’s website, reflect a focus on maintaining a vibrant currency market.

The MPC raised the Monetary Policy Rate (MPR) to 26.25 percent while retaining other policy parameters.

Since the April low, Nigeria’s foreign reserves have appreciated by $2.98 billion, showcasing a significant recovery amidst ongoing economic reforms.

This rebound provides a measure of optimism for the nation’s economic stability, particularly as it grapples with the broader impacts of currency devaluation and inflation.

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