When even hedge funds are overwhelmingly on the same side of an investment as the broader market, you know it’s a crowded trade.
This is where the euro finds itself going into 2015. Traders, investment banks, asset managers and the so-called “smart money” of hedge funds are all betting on a weaker euro, leaving the only point of disagreement being by how much.
The rationale behind it is simple: the European Central Bank will aggressively ease monetary policy by undertaking a large-scale government bond buying programme to prevent low growth and inflation from strangling the region’s economy.
The contrast between monetary easing and weak economic growth in the euro zone with likely monetary tightening and stronger growth in the United States should push the euro lower.
ECB president Mario Draghi has indicated that the central bank is poised to expand its balance sheet by around 1 trillion euros of asset purchases, including politically sensitive purchases of government debt.
It is a policy that has already been adopted by the U.S., UK and Japanese central banks since the 2007-08 financial crisis, with varying degrees of success.
But the only problem with the expectation of a lower euro next year is that everybody shares it.
“I’ve never seen such a big consensus in my 20 years of investment life,” said Yves Kuhn, chief investment officer at Banque Internationale à Luxembourg.
“I just don’t like a consensus like that.”
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