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Shorting the euro is a trade that has become more crowded than ever. That doesn’t necessarily mean it’s wrong.
Speculators, or traders who don’t have a commercial hedging interest, were net short the euro vs. the US dollar by a record high 116,000 contracts last week, according to the CFTC's commitment reports of futures positions at the Chicago Mercantile Exchange, points out Ashraf Laidi, CEO of Intermarket Strategy in London.
Typically when everybody and their grandmother has piled into a trade, it’s a good time to start thinking about moving in the other direction. And on Friday there were currency traders in email and on CNBC talking about how to maybe profit from a euro bounce.
One problem with this idea, though, is that the euro, despite a massive pile of bets against it, has not fallen nearly as far as it did the last time there was a huge wave of short interest, notes Laidi:
The previous record occurred in June 2010, when EURUSD bottomed at $1.1780 during the initial wave of downgrades, focusing mainly over Greece & Ireland. …
Unlike in 2006-2009 when there was a time lag between speculators' positioning and the spot value of EURUSD, the relationship between the two has grown tighter since 2009 — with little or no time lag. This means we can no longer use speculative positioning as a leading indicator for turnarounds in EURUSD as was the case in 2007.
With net euro shorts at record highs while EURUSD is only at 11-month lows, the currency’s downside potential remains ample.
The euro is currently at about $1.30 against the dollar, still well above its previous lows and likely way to pricey considering the challenges it faces.
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How can EVERYONE be short the Euro when in fact if you go short the Euro someone else has gone long the Euro? Please make sense.
He makes some valid points, though there have been many occasions when he has been wrong too.
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