Euro optimism fades among German corporates; positioning points to potential slide

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Optimism among German corporates over the euro’s short-term prospects is crumbling, while medium-term positining hints at a sharp fall for the single currency.

That is according to a regular survey from Commerzbank, which shows that the euphoria surrounding the single currency created by the European Central Bank’s (ECB) announcement in September of a new bond-buying programme is evaporating. The strategically oriented market segment has a good track record in predicting currency moves, consistently outperforming hedge funds and other currency managers in recent years.

Performance of trades according to Compass index
 versus Stark index

 Source: Bloomberg, Commerzbank
After the ECB’s announcement in September, German companies went long EURUSD for the first time in 13 months, but that enthusiasm was tempered in October. “The surveyed companies used the quiet market environment for a re-evaluation and put a healthy share of scepticism into the current ‘risk-on’ mantra,” says Alexandra Bechtel, analyst at Commerzbank. “The leap of faith in the ECB measures has eased to a more realistic level.” Commerzbank surveys the expectations of its main export-oriented corporate clients each month to produce its FX Compass index. It measures the proportion of bulls minus the proportion of bears in a number of EUR crosses over three-, six- and 12-month horizons.

German companies assessment of EURUSD over the next 3, 6 and 12 months

 Source: Commerzbank
Over the three-month horizon for EURUSD, the Compass index fell from 15 in September to just 7 in October. That contrasts markedly with positioning figures from the Chicago Mercantile Exchange that shows short-term IMM speculators have trimmed their short EUR positions over the past month.

EURUSD positioning of speculative and strategically
 orientated market participants

 Source: CME, Commerzbank
Over the six-month horizon, the change in positioning by German corporates was more striking, with the Compass index dropping from -9 to -25. Furthermore, the proportion of EUR bears over that time period rose to 51%. The only time the survey has captured that number of EUR sceptics was in April 2011. April 2011 was a time when EURUSD was hitting multi-month highs of just under $1.50 as the ECB delivered its first interest rate rise since the start of the financial crisis. The ECB was soon overwhelmed by the eurozone debt crisis, while bearish German corporates were benefiting from a 10-big-figure drop in EURUSD. If history is any guide, the current shift in sentiment from German corporates could be a signal that the recent ECB-inspired rally in EURUSD is about to end.