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Foreign Exchange

IMM: EUR short positions extended

Speculators on the CME extended their net short positions in the EUR ahead of the EU summit meeting last week.

Having cut their net short positions in the single currency sharply in the previous week, fresh bets on EUR weakness were placed amid scepticism that anything concrete to address the region’s debt crisis would emerge from the meeting of European leaders that concluded last Friday. The latest Commitment of Traders report, issued by the Commodity Futures Trading Commission, shows investors net sold 18,000 EUR contracts in the week to June 26. That raised the value of the bets against the single currency by $2.6 billion to $25 billion.

The shift was driven by a reduction in gross long positions, with gross short positions in the EUR remaining little changed.

 EUR shorts widen ahead of EU summit

 
 Source: ScotiaFX, CFTC

The bearish shift in positioning is likely to have exacerbated the reaction to the outcome of the summit, which drove a two big figure rally in EURUSD and boosted other risk correlated currencies.

EURUSD was driven higher as investors staged a collective sigh of relief that EU policymakers appeared to make progress in containing the region’s debt crisis.

The decision by EU leaders to inject capital into European banks and treat it as equal to their existing debt was seen as important step in breaking the negative downward spiral of the link between EU banks and sovereigns.

That combined with low expectations of any sort of deal to unleash a wave of EUR buying.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says although he is sceptical of the extent to which the EU Summit is really the game changer that European leaders suggest, he recognizes that their actions may help arrest the downward spiral of sentiment in the region.

“Even if there is some immediate consolidation as the market weighs the significance of the EU developments, the risk is that the euro finishes the week ahead higher,” he says.

“The $1.2780-$1.2820 area [in EURUSD] is the first objective. A break above here may encourage a return toward $1.30. A move now below $1.2550 and especially $1.25 would negate the euro's more constructive technical outlook.”

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