By Jamie McGeever

ORLANDO FL (Reuters) – The European Central Bank is expected to raise interest rates in the next month. That will open up opportunities for European hedge funds to buy euros. That is precisely what they have done.

U.S. futures data show that speculators have their largest net-longeuro position in twelve weeks and that May was the second most positive month-on–month shift in funds in almost two years.

According to the latest Commodity Futures Trading Commission Report, funds have increased their net-long euros holdings by approximately $2 billion over the past week. This accounts for almost two-thirds the $3 billion drop in long-dollar positions against G10 currencies.

The net-long-dollar position has declined by $5 billion against G10 currencies over the last two weeks due to an identical $5 billion increase in net-long euros positions.

CFTC funds’ net-longeuro position grew to 52,272 contracts in the week ending May 31 from 38,930 the previous week. The bet they placed on the euro appreciation is now valued at $7 billion. This compares to $5.2 billion one week ago.

The long-term position in an asset or security represents a betting that its value will increase. While a short position can be the reverse, it is still a position to place a risk.

Graphic: CFTC euro position – $ value – https://fingfx.thomsonreuters.com/gfx/mkt/lbvgndxwmpq/CFTCNetEUR.jpg

Graphic: CFTC euro positions – monthly change – https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwebxgpo/CFTCEURMONTH.png

ECB EYEING a 50-BPS HIKE

It has been amazing to see the shift in ECB’s expectations. A month ago, CFTC had a modest net-short position in the euro. In mid-May the euro fell as low as $1.0350 and there was much talk about parity with US dollars.

However, eurozone inflation is still rising – 8.1% was recorded in May – so the question now is not whether or not the ECB will increase rates for July for the first-time in more than a decade but how much.

Graphic: Euro FX rate vs dollar – https://fingfx.thomsonreuters.com/gfx/mkt/egpbkwglwvq/EURUSD.png

Several ECB officials suggested the possibility that the Bank might move 50 basis points. Deutsche Bank Economists expect the second quarter’s rate increase to be 50-bps, with a greater likelihood in September than in July.

Societe Generale economists said on Friday, “We wonder why ECB hasn’t acted yet.”

On Thursday, the ECB will outline its plan for a July rate increase. Markets for Euromoney are pricing in rate hikes of 100 bps each month by October and 125 by year end. The euro is close to $1.08 after rebounding to its one-month peak.

Participants in foreign-exchange markets are listening to the ECB’s inflation-fighting talk and keeping in mind its 2008 and 2011 rate increases, which analysts claim were serious policy mistakes.

At least for the moment, there are hedge funds on board.

Other columns:

The rates of the U.S. slump in growth are seen as a peak by hedge funds (May 23rd)

G7 Pressure on Dollar: Yellen Could Face (May 18).

(The views expressed in this article are the opinions of the author. He is a columnist with Reuters.

(By Jamie McGeever of Orlando, Fla.; Graphics and editing by Matthew Lewis; Graphics by Jamie McGeever & Saikat Chatterjee