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Foreign Exchange

EUR short positions at fresh extremes

Another day and more signs that EUR positioning has moved to extreme levels, but the question is whether historical comparisons are relevant as the single currency threatens to implode.

As worries over a Grexit have morphed into concerns over Spain – now dubbed Spanic – it is little surprise that EURUSD is notching up fresh trend lows. Add in talk that the Swiss National bank is recycling the proceeds from its EURCHF intervention by selling EURUSD, and there is no shortage of reasons to be bearish on the single currency.

One source of support, though, that keeps resurfacing is the notion that since investors are now short, the market is vulnerable to a short squeeze in EURUSD.

Citi is the latest source of positioning data suggesting extremes are being notched up in EUR bearishness.

Its CitiFX Positioning Indicator (CFPI) for EUR touched a record low last week, hitting -2.50 last Thursday before bouncing in subsequent sessions.

The move has been sudden. In the three weeks to last Thursday, the CFPI, which tracks positioning among programmes on the bank’s CitiFX Access Platform, dropped from a moderate long position of 1.75 to -2.50.

That marks the fourth largest three-week decline in positioning for any leading currency since the bank started tracking the indicator in mid-2011.

 CitiFX Positioning Indicator - three-week change

 
 Source: Bloomberg, CitiFX

Citi says only the bout of GBP selling in late 2011 and the moves to JPY shorts in late 2011 and early 2012 were more rapid than the recent shift in EUR positioning.

“Since records are made to be broken, it is difficult to say that the shift to an extreme short EUR position will be sufficient to avert further downward pressure on spot,” says Todd Elmer, FX strategist at Citi.

“A new, even larger record short EUR position could be recorded in the days ahead.

Nevertheless, he says if EUR positioning follows a similar trajectory as that for GBP and JPY after comparable falls, some buying could be in the offing during the next few days.

“While these episodes of GBP and JPY buying did not provide a valid signal for longer-term moves in spot, both currencies stabilized somewhat versus the USD, as investors pared back shorts,” says Elmer.

“This implies any further EUR decline could face greater resistance.”

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