Flows, not growth fears, drive euro to five year lows – BNP Paribas

div classBodysc17zpet90 cdBBJodivpBy Saikat Chatterjeep

pLONDON Reuters – Big speculative flows and not concerns about a worsening economic outlook explain the euros slide to a fiveyear low below 1.05 this week, a study by BNP Paribas showed.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pBNP Paribas strategists said the euros fall was driven primarily by large speculative flows with volumes centered around socalled “daily fixings” for currencies. p

pThis is an unusual development and suggests some investors could be taking out large positions on the direction of the single currency, which is down over 4.5 versus the dollar in April and set for its biggest monthly drop since 2015.p

p“Our analysis has shown that flows rather than fundamentals may have been the key driver behind the euros drop over the last week as around twothirds of the decline was focused around the fixings,” said Alexander Jekov, an FX strategist at BNP Paribas in London.p

pThe global 6.6 trillion a day currency markets operate 24 hours a day, five days a week, with no equitiesstyle closing price to use as a reference point. Therefore, many investors use a handful of fixes as the daily benchmark rate for their currency trades to mark their portfolios.p

pLondons socalled 4pm fix, run by Refinitiv, is the most commonly used benchmark in foreign exchange. The fix is a fiveminute period of trading used to calculate daily exchange rates that underpin a huge range of transactions.p

pThe euro fell on Thursday to 1.0469, its lowest level since January 2017, with Russias move to cut off gas supplies to Bulgaria and Poland dealing the latest blow to a struggling currency.p

pHowever, its more than 3 drop this week far outpaces the decline in European stocks, down less than 0.7 so far this week, and German bonds, set to end the week with a small net price gain. p

pThis suggests the euro‘s decline was triggered by some large FX trades with moves exaggerated by relatively low volumes. It also helps explain why the single currency did not benefit from the surge in interestratehike expectations on Thursday after data showed inflation in Europe’s biggest economy Germany rose to a fourdecade high at 7.8 in April.p

pDaily average turnover of about 5000 trades this week on the EBS platform, which is the world‘s biggest multidealer foreign exchange trading platforms, was about half of that recorded in the initial days following Russia’s invasion of Ukraine on Feb. 24.p

p“On our fair value estimates, eurodollars fair value stands at 1.11 which is close to the biggest valuation discount to the spot market since the launch of our model more than a decade ago,” Jekov said.