Strong outflows may weigh on the euro

Contrarian alert! Net short euro positions on US futures markets hit a fresh record in the week ending March 31, according to data from the Commodity Futures Trading Commission.

Such extremes can leave markets vulnerable to a trend reversal, in this case a possible period of euro strength.

But even though the single currency by mid-session on Tuesday was nearly 4 per cent above the 12-year trough hit last month, further depreciation is likely, says Societe Generale.

The bank reiterates the two main reasons that have been driving sentiment for sometime.

First, "the desynchronisation of central bank policies is a long-term theme, with euro rates expected to stay low, while US and UK rates should rise in the medium term".

Record low eurozone yields will encourage investors to seek higher income overseas, notably the US.

"Given the large amount of maturing European principals and coupons to be reinvested in 2015 (c. €1.15trn), this could lead to strong outflows over the next quarters and weigh on the euro," SocGen reckons.

Second, political risk remains. The risk of a Grexit is "not negligible", while in Spain, "the electoral marathon, which started last month, could increase political instability, with Podemos' progress to be monitored".

The impact of a falling euro on European stocks will depend on whether it is based on continuing ECB largesse (equity-positive) or heightened political risk (not so good).

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