Data from the CFTC showed speculators on the Chicago Mercantile Exchange increased their bets against the euro to an all-time high of 127,879 contracts in the week to December 27. That was well above the previous record, which was set at the height of the first round of the Greek sovereign debt crisis in 2010, and was up from 113,700 in the previous week.
“Since spot EURUSD is now trading a little above last week’s lows, it seems that short covering is allowing positions to stabilise for now,” says Jane Foley, FX strategist at Rabobank.
In tandem with the pressure on the euro, speculators on the CME increased dollar long positions, although they still remained below the highs hit in October.
Meanwhile, long positions in the Australian dollar and the Canadian dollar also increased further.
“This better tone is consistent with talk that investors are seeking fresh euro diversification trades,” says Foley.
| Euro short positions hit record levels |
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| Source: Reuters EcoWin |
Although the notional volume of transactions on the CME is tiny relative to the turnover in the interbank foreign exchange market, analysts say positioning can be instructive of broader market sentiment and gain in relevance as positions become stretched.
This is because extreme positioning is often a pre-cursor to a counter-trend reversal.
However, Citi said its Pain index on hedge-fund positioning painted a much more balanced picture of market positioning.
It claimed the index, which tracks the correlation between hedge-fund returns and moves in the exchange rate, showed that investors pared back short EUR exposure as early as mid-November.
“Since our index tracks a range of different strategies, it likely covers a larger segment of the market than the CFTC data,” says Todd Elmer, strategist at Citi.
“This leads us to conclude that the latter is probably overstating the degree to which investors remain short EUR, and with relatively balanced positioning to start the year, we doubt this factor will act as a constraint against spot moves in either direction.”