Speculators remain complacently short the Euro
Throughout the recent recovery in the euro from the mid-$1.04 area to the mid-$1.14s, both small and large speculators remained net short. In fact, according to the Commodity Futures Trading Commission’s (CFTC) Commitments of Traders Report, large speculators (those with deep pockets and assumed to be sophisticated) had only covered roughly 25% of their bearish position near last week’s peak. Specifically, this group of well financed speculators reduced their net short holdings to about 168,000 contracts, from 226,000. This leaves the door open for quite a bit more short covering in the weeks and months ahead, should they decide to unwind the remaining contracts.
Habitual Patterns in the Euro
The euro has a long history of over-crowded trades in both bull and bear markets. Further, we have never seen such as large one sided position in euro futures. At the trough set in March the COT’s large speculator group was as short as it had ever been, at about 226,000 contracts. Additionally, this is over double the largest net long position ever held by large speculators, which was roughly 96,000 contracts. Simply put, speculators have never had more cards on the table than they do now. If luck isn’t on their side, we could see a repeat of the 2008, 2010, and even the 2012 bottom in which short speculators were painfully squeezed out of bearish trades.
Large speculators have almost always reduced, and eventually reversed, their net position in quick fashion once the unwinding of an over-crowded trade commenced. If we get a repeat of the norm, the euro rally could merely be in its infancy.
Conclusion
In a nutshell, it hasn’t paid off to focus on fundamentals while ignoring the chart and the implications of an over-crowded trade. The Euro-zone fundamentals might seem dismal, but we’ve been here before and the outcome didn’t resemble the expectations of the majority.
