German corporates prepare for long-term euro strength

Commerzbank surveys the FX expectations of its main export-oriented corporate clients each month to produce its FX Compass positioning index, which measures the proportion of bulls minus the proportion of bears in a number of EUR crosses over three-, six- and 12-month horizons. As we have noted here at EuromoneyFXNews before, those views are worth listening to given that since the inception of the Compass Index, they have consistently outperformed the professional FX fund managers tracked in the Stark Index.

The results of the July survey show that German corporates believe the euro’s medium-term to long-term appreciation chances have been reinstalled after the EU summit that ended on June 29.

Although worries over the eurozone debt crisis have since resurfaced, the decision by EU leaders at the summit to inject capital into European banks and treat it as existing debt was seen as an important step towards breaking the negative downward spiral of the link between EU banks and sovereigns.

EURUSD expectations for the six- and 12-month periods changed markedly, with corporates much more optimistic for the single currency.

The number of euro bears fell by 10% over six months and 11% over 12 months, while the number of euro bulls rose by 8% and 9%, respectively. The improvement in sentiment towards the single currency is reflected in the positioning index, which over six months moved from a clear short position of -23 points in June to a relatively neutral reading of -4. Over 12 months, the index surged from 7 to 27, its strongest level since January.

“It seems that, after the EU summit, the medium- and long-term chances of the euro are believed to have considerably improved,” says Alexandra Bechtel, strategist at Commerzbank.

In the short term, however, respondents kept to their negative view of the single currency. Like IMM speculators on the Chicago Mercantile Exchange, strategically oriented companies only marginally cut their short positions, with the index for EURUSD over three months rising from -37 in June to -34 in July.

“The companies in our survey are still cautious and are not betting against the euro depreciation trend,” says Bechtel.