RBS Unit Tells Euro-Long Clients Their Bullishness Is Premature

(Bloomberg) -- The euro is the favorite currency of most investors met by NatWest Markets's Mansoor Mohi-uddin and his colleagues. Their bullishness “appears premature” as the European Central Bank won't be rushing to unwind its stimulus, he said.

The ECB's leadership won't taper while it remains unconvinced that inflation will approach a 2 percent target, said the strategist at the Royal Bank of Scotland Group Plc unit. Most of the 70 clients met in London, Stockholm, Beijing, Tokyo, Singapore and New York this quarter favored the euro more than the dollar, yen and pound, he said.

The euro slumped after ECB President Mario Draghi said Monday the region still needs expansive monetary stimulus to restore stable inflation even as growth accelerates, damping speculation the central bank would signal a tapering at its meeting next week. Options traders have become bearish again on the single currency versus the dollar, after turning bullish in early May, according to one-month risk reversals.

“The strongest view of U.S., European and Asian clients among the G-4 majors is to favor the single currency,” Singapore-based Mohi-uddin said. “Until the ECB signals it will start tapering its bond buying, its prolonged quantitative easing will remain a substantial headwind to further gains.”  

He is advising clients to bet on the euro's decline against the Swiss franc and the dollar's gain versus the yen. The euro slid as much as 0.5 percent to $1.1110 in London, falling for a fourth day. It remains the best-performing developed-market currency after New Zealand's dollar this month.

Speculative Bets

Hedge funds and other large speculators boosted their bullish euro wagers to the highest since October 2013, U.S. Commodity Futures Trading Commission data show. A strengthening recovery in the euro area and Emmanuel Macron's victory in the French election this month have lifted the 19-nation shared currency.

The single currency is set to remain in the lower half of the $1.03-to-$1.17 range it has been trading in since mid-January 2015, if the ECB maintains the pace of its quantitative easing program this year while the Federal Reserve continues to raise interest rates every quarter, Mohi-uddin said.

Inflation rate for the region probably fell to 1.5 percent in May, from 1.9 percent, data due Wednesday may show, according to economists surveyed. More worryingly for the central bank, core inflation is slated to slow to 1 percent.

“If this month's CPI report shows underlying inflation remains subdued, the ECB is unlikely to signal any change in its quantitative easing program in June,” Mohi-uddin said.

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani