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Foreign Exchange

Record IMM EUR shorts does not preclude further downside

EURUSD may still have further to fall despite net short EUR positioning on the International Money Market rising to record highs.

The latest positioning data published on Friday by the CFTC on IMM traders showed net short positioning in EUR reached an all-time record of 116,000 contracts, but it should be noted that this also came in tandem with an increase in the overall number of contracts traded. The share of EUR shorts as a proportion of the overall number of directional positions by non-commercial traders on the IMM has stayed roughly the same since late October at around 80%.

However, recent price action has shown spot is able to move lower even when the market is seemingly united by euro bearishness. EURUSD has come down from above $1.35 in late October/early November to $1.30 as we approach the year end.

Furthermore, the most recent FX flow data from major banks shows some of the biggest players in the market have neutralised EUR positions going into the year end. UBS reported that hedge funds and even asset managers were net buyers of EURUSD last week as they took profit on previous shorts.

Citi’s PAIN index, also suggested hedge fund positioning in EUR was now virtually flat pointing to lower risk of a big short squeeze. The hedge fund positioning indicator has been in a narrow band around zero since the middle of November as investors reduced risk positions in their portfolios.

“While ‘positive’ news probably still represents the greater surprise, it does not appear as if there is significant risk for stop-loss driven EUR buying,” said Todd Elmer, currency strategist at Citi.

Net shorts  may be at record highs but the euro is nevertheless a long way off its all time low of $1.17 suggesting there is still plenty of room for the euro to fall. With ratings agency downgrades seemingly imminent, the euro could well test the 2011 low of $1.2876 and be in line for further pain if the pace of capital flight accelerates.

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