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

Fri, April 29, 2022
By Saikat Chatterjee

LONDON, April 29 (Reuters) - Big speculative flows and not concerns about a worsening economic outlook explain the euro's slide to a five-year low below $1.05 this week, a study by BNP Paribas showed.

BNP Paribas strategists said the euro's fall was driven primarily by large speculative flows with volumes centered around so-called "daily fixings" for currencies.

This 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.


"Our analysis has shown that flows rather than fundamentals may have been the key driver behind the euro’s drop over the last week as around two-thirds of the decline was focused around the fixings," said Alexander Jekov, an FX strategist at BNP Paribas in London.

The global $6.6 trillion a day currency markets operate 24 hours a day, five days a week, with no equities-style 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.

London's so-called 4pm fix, run by Refinitiv, is the most commonly used benchmark in foreign exchange. The fix is a five-minute period of trading used to calculate daily exchange rates that underpin a huge range of transactions.

The euro fell on Thursday to $1.0469, its lowest level since January 2017, with Russia's move to cut off gas supplies to Bulgaria and Poland dealing the latest blow to a struggling currency.

However, 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.

This 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 interest-rate-hike expectations on Thursday after data showed inflation in Europe's biggest economy Germany rose to a four-decade high at 7.8% in April.

Daily average turnover of about 5000 trades this week on the EBS platform, which is the world's biggest multi-dealer foreign exchange trading platforms, was about half of that recorded in the initial days following Russia's invasion of Ukraine on Feb. 24.

"On our fair value estimates, euro-dollar's 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. (Reporting by Saikat Chatterjee; Editing by Dhara Ranasinghe and Toby Chopra)