Bets against euro surge to fresh record highs

Data from the CFTC showed the value of net short euro positions on the CME rose to a record $22.7 billion in the week to January 3, with net short positions rising to 138,900 contracts from 127,900 in the previous week. Gross short euro positions increased to a record 179,000 contracts, while traders still held 40,000 long euro contracts, which was well above the record low of 4,000 long contracts registered in August 2004.

“Accordingly, the short position is extended but there are still longs in the market who are likely in the midst of capitulating,” said Camilla Sutton, chief currency strategist at Scotia Capital.

She said it could be argued that with such large short positions built, there was limited room to build more and the euro now became vulnerable to short covering.

“This is a risk, but we expect further near-term downside before the market stabilises,” she says.

Notably short euro positioning as a percentage of open interest stands near record highs at 49%.

Traders also more than doubled the net long yen position, bringing its value to $5.6 billion, just 14% below the record long position reached in March 2008.

Positioning for further yen gains is now greater than the peak on October 25 and the highest since August 2, both of which shortly preceded unilateral intervention from Japan to rein in the strength of its currency.

With risky assets performing well, analysts said it appeared it was not risk aversion that was fuelling demand for the yen, but the search for an alternative to the euro.

Investors cut net long dollar positions by $4.73 billion to $16.47 billion, but remained long of dollars against every currency except the yen, the Australian dollar and the New Zealand dollar.