Where the world would buy in to EURUSD; hedge funds look for $1.05


Peter Garnham
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There is no shortage of recommendations to sell the EUR after last week’s decision by the European Central Bank (ECB) to cut its deposit rate to zero, but where will buyers come in?

There were wide variations within regions, with Most now see the EUR as a funding currency, with the rate cut signalling a desire from the ECB for a lower currency. Indeed, EUR has dropped from the fourth to second-lowest yielding currency. Only the CHF has lower funding costs, which analysts say is likely to push FX carry models to further increase funding positions in EUR, instead of USD. With so many now bearish on EURUSD – and the currency pair within sight of the June 2010 low at $1.1876 – the question is where investors would start to buy EURUSD? That is what Société Générale (SG) asked 6,700 of its clients, and the results make interesting reading. Firstly, the median answer was $1.15. That was four big figures below the level when SG last asked the question in May. Asia looking to buy at $1.18, Europe at $1.12 and the US not interested until $1.05.

 EURUSD: Median purchase price per region

 Source: SG Cross Asset Research
There were also striking differences between client types. Corporates, at $1.17, were the most eager to buy, while banks and real money would be in the market on average at $1.15. Hedge funds, however, were not interested in buying EURUSD until $1.05.

 EURUSD: Median purchase price per client type

 Sourve: SG Cross Asset Research
To get a sense of whether the option market correctly prices in the risk of a lower EURUSD, SG compared the distribution of probability given by one-touch options versus the survey. “We find that the option market now correctly prices in the underlying demand, bidding at a fairly steady premium to downside risks,” says Sebastien Galy, FX strategist at SG. “The only exception seems to be for tight ranges or gamma.”

 Cumulative distribution of EURUSD purchases

 Source: SG Cross Asset Research 
While the ECB might have lowered expectations for the value of the EUR, confidence in the future of the single currency project has increased. Some 98.7% of respondents thought the EUR would still survive as a currency in two years’ time, up from 95% in the last poll. Meanwhile, respondents thought between 1.36 and 1.43 countries would leave the eurozone in the next year. May’s poll showed, in contrast, between 1.62 and 1.72 countries would leave.

So, investors now believe just Greece will leave the, albeit lower, EUR.