Is The EUR Risk-On Or Risk-Off?

Tyler Durden's picture

The slings and arrows of outrageous EUR positioning remain key to figuring out where next in this on-again-off-again currency. The last six weeks or so have seen a dramatic regime shift from smooth transitions from risk-on to risk-off to more staccato-like jumps and trends as the world hangs on every rumor and flashing red headline. We note three things that may be critical to understand where we go next: 1) EURUSD has entirely recoupled with its EUR-USD 'swap-spread' implied fair-value - removing the 'chaos premium' in the pair, and providing less room for upside without broad-market agreement; 2) EURUSD has decidedly lagged the very impressive rally in European sovereign risk (suggesting the latter may be a little over-exuberant); and 3) Despite every talking head telling you about 'all the EUR bears', both Commitment of Traders and Citi's FX positioning indicator have shifted notably more positive - with the latter, as Steve Englander notes, beginning to show significant EUR longs. Now that an active segment of the market actually seems long EUR and associated currencies, the 'good news' bar is a lot higher, and the impact of bad news will be more readily visible.


The relationship between EURUSD and the S&P 500 e-mini futures (ES) has become far more rapid in its regime shifting (lower pane is intraday correlation)...


EURUSD has for the third time since the epic crisis began, crashed and reverted to its EUR-USD 'swap-spread-differential' model fair-value. Notably each time has seen EURUSD sell-off significantly relative to swap-spreads (as FX positioning dominates any interest-rate carry drivers and 'stress premia' get priced in), then gradually swap-spreads will 'normalize' back down to the 'new levels, with a final flourish push higher in EURUSD to recouple with rates as the 'chaos' premium is removed. Also of interest is that in this downtrend from the middle of last year, EURUSD has been unable to sustain any positive premia to this rates-model as pressure always remains...


and in the meantime, European sovereign risk has rallied dramatically - diverging initially from EUR weakness but now EURUSD is catching up (albeit very gradually). We suspect (strongly) thatthe strength of the European sovereign rally (GDP-weighted in this chart) is overdone in very thin illiquid markets and the 'fair' value lies somewhere wider (as can be seen in the last few days that realization appears to be happening)...


and finally to positioning, where Commitment of Traders' data shows a significant push higher (squeeze) which led the rally - though obviously still remains negative.


and Via Steven Englander of Citigroup:

When we look at our CitiFX Access positioning indicator we are struck by the swing in fortunes of euro. In less than a month the euro and its traveling companions, CHF and, to some degree, GBP, have shifted from being currencies that everyone loved to beat, to beginning to show significant longs. In the chart below we plot the CitiFX Access combined position for EUR (light blue) EUR and CHF (azure) and EUR, CHF and GBP (dark blue). We combine EUR and CHF because there has been virtually no volatility over the last year, so it is realistic to view investor shorts in one or the other currency as excellent substitutes. We combined GBP with EUR and CHF, because it gives a good representation of core European currency positions.




Both are at their highs of the year, with the EUR and CHF combined position having swung massive in less than a month. The way to interpret the move from -3 to 0.75 is that the combined EUR and CHF short in late july was approximately three times the average position size (where we measure the position size in absolute terms,, setting aside whether investors were long or short). Now the long is 0.75 times the size of typical positions and by far the ‘longest’ of the past year. When we include GBP, the position swing is much less dramatic but still takes us to the longest joint long of the past year. The EUR positioning move has been similar but we think the combined positions are more relevant. (That said, the CitiFX Access data are probably most indicative of what active traders are doing.  Non-leveraged investors still appear to be short EUR, although less short than they were earlier this month.)


The timeliness of the CitiFX Access positioning data is an important advantage, as is its daily frequency. Our last observation is Wednesday Aug 22 so we can glimpse post-Minutes repositioning in the last observation. On Wednesday EUR+CHF longs as well as EUR+CHF+GBP longs went up by 0.5. More interesting is that this was just extending a move that began in earnest on Monday of this week. The EUR+CHF position went up by 1.18 and the EUR+CHF+GBP position by 1.75 (to put this more concretely, if the typical position size was 100, the swing over these three days was 118 and 175 in the long direction). This suggests that the renewed rumors of ECB bond market intervention earlier in the week were already having a major impact on positions before the Minutes were released, but it looks as if the FOMC extended the move.

We tend to view the first move from positioning extremes as the easiest one because the bar is so low for a reversal. Now that an active segment of the market actually seems long EUR and associated currencies, the ‘good news’ bar is a lot higher, and the impact of bad news will be more readily visible.


Charts: Bloomberg, Citi, and Capital Context

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fonzannoon's picture

The question I want to know is has gold decoupled from everything or is it simply the usd having a rough week.

Muppet of the Universe's picture

Let's just say that gold has begun reverting back with the markets... on a long term timeline. 

& you can expect this trend to continue for sometime.  But for the short term... watch out for that snapback ;D

LongSoupLine's picture

Amazing how charts can make it all look so legitimate and logical.


hell, just ask Madoff, Stanford...and, of course, the best of them all...the Fed and BLS.

Muppet of the Universe's picture

These notional values and ratios hold an insane amount of insight: But they are not the only way to view the market unfolding. 

Sometimes the way these correlations and ratios hold true, and the way the markets unfold through different strategic lenses... blows my mind.  Because they are so complex and intricate, but all of them "find" ways of working together.  If you will, correlated correlative correlations; Fractal in nature...  Quite literally, the measure of correlations and ratios, that are the markets, are literally correlated with each other, synced to perfection in such a way that they create in a beautiful system of coordination... almost as if by design.


Without a doubt, I will never forget my experience with the markets-manipulated or not.  It has opened my eyes to the potential of capitalism.  Because at first it seems like chaos - a million people all fighting each other with a slew of different strategies and methods...  But upon closer examination, it becomes a clean, complex network or coordination that defies the logical expectation of chaos.

I guess my expereince with correlation and arbitrage is still growing, and I have much to learn yet.

Never doubt the precision of the markets to return to 1 or -1... or even 0 (now how many of you arbitraguers can say you trade items with exactly 0 correlation?  LOL Welcome to my world).  Which at the same time, LOL, is the damnation of the market itself! As Taleb, Levey, and Laplace would say, eventually all things return to 1:1, and what a faster way to do this than to introduce complexity, and thus fragility? 

& you know what is most interesting?  Both Taleb and Famah are correct!  Black, Sholz and Murton weren't. LOL.


& I can stil drive home wasted and write dynomite 6 beers and 6 shots in...  XD

Despite all your power and wealth 33rds; this muppet sees the world like you never will.

Yen Cross's picture

  The euro was, and continues to be funded by you know who.

   Until the (3000 year old) FEUDS are settled, bad blood will flow.


    The peripheral E/U countries are at ' High Risk'.  I'll generate some figures, and understand the animosity.

  The ECB/sovereign banking system, has always been know for "sterilzing" monetary input.  Hence; the " insane usd selloff"

    Europes credit markets are locked up as we speak!  hence the reverse REPO's.  Have a nice Week End.<

fonzannoon's picture

great freakin post yen. I am in a war with a bunch of seeking alpha sheep but I had to stop and give you a greenie.

Yen Cross's picture

fonzannoon     nothing special about me.   I'm very impressed with your comments.  You are A TEACHER!  

  I should post more @ seeking Alpha. Those guys are so damn smart, I  should give them more " Cred."   That's a great site, with some Great people!

    Thanks Again.:-)


  " Fonz , Seeking Alpha, is like a " Templar Meeting" once a month. You did good.

Muppet of the Universe's picture

Untrue!  I also funded the long euro cause!  Partly because Dollar was going to fall.  But... also because Draghi said, in the most creepy and eery way... The Euro will not break 1.2, & the general tone of his words, and the grin on his face... You knew he wasn't bullshitting anyone.  He thought it was hilarious.

Yen Cross's picture

 Tyler your charts are awesome. The euro should peak (purchasing/power ) in February 2013.

   The) exchange rates tend to lag credit markets. I personally would technically, look @  "8" handles lower.

   This is purely technical.   eur/usd @ 1.12 area by Thanks Giving. I realize every "algo" will trade against me.


    Perfect world figures.   +20/40-

Atomizer's picture

Hello Yen.. You must be banking on turbo timmy to submitt another G Fund letter. LOL

Yen Cross's picture

 Atomizer     Thanks for the link.    Digesting it.    I like that "G-fund" sarc :-) 


    HARRY BARF fUCKING Reid? I'm still gonna read for ammunition!

Atomizer's picture

We're just about out of money again.. Someone cannot increase the debt ceiling prior to his election. What a clusterfuck for some. Perhaps they can place the expense's on another ledger to make things seem stable to public voters sitting on the fence.


Yen Cross's picture

Atomizer      clearly stated yesterday, that our debt ceiling issues ,far out weigh (qe-3) issues.

  I don't follow( individual), poster quotes Atomizer.  I follow the quality of the post!                             

      You are a , Quality Poster. ;-)


Muppet of the Universe's picture

100k says you don't trade or you'll end up in margin call in <1 year. 

q99x2's picture

Banks should be able to fleece the longs at this point.

TheSilverJournal's picture

You can look at the charts all day, but all you need to know is to just buy silver.

Yen Cross's picture

OT:  Apple over Samsung  ) silence of the lambs?

neutrinoman's picture

EURUSD is definitely a "risk-on" trade. It's been many, many months since the euro acted in any way like a "risk-off," reserve currency.

Think of it as a "junk" currency, like a "junk" bond: a high-grade one, to be sure, but not a reserve currency.

Yen Cross's picture

neutrinoman                   the euro is a risk/gold currency    ( eur/xau)   You are over thinking values.

    Junk is a (precept) from the 80's.  Fractional reserve policy, (AKA), your ("Liberal Douche bag/community college teacher"),

 Can explain this for you!

dexter bland's picture

Depends where the risk is doesn't it? Up until recently the risk has been in a currency break-up. That's still there but looks a lot less likely. But what happens if/when ECB gets their way, cuts so there is no interest rate differential and they also start printing money via bond purchases?

That should weaken the currency and give it some use on the short side of a carry trade. So perhaps this rally is temporary whether they get their act together on fixing the EMU, or not? I don't know - I am neutral on this pair right now.

Short AUDUSD is a better trade for me, can see AUD also starting to decouple from the "risk on" as its commodity based fundamentals weaken, and the economy starts to get dragged down with the rest of the world.

Perhaps the binary risk on/off trade is a concept that has had its time?

AynRandFan's picture

Nice idea about shorting the AUD.

Yen Cross's picture

 Do Not short Aussie yet! head fake. Asia open will yield .73% off friday close!

Yen Cross's picture

 All I know is Tyler called  it! A slight dip/blip and a retrace to 38.2% on that VIC chart. He is/was right, and I trade currencies.

 The flows add up, and vanilla,dnt, options are toast for 200 pips! ( yards wise)

AccreditedEYE's picture

As Germany and the "stronger" EUR members begin to succumb to this socialist garbage of bailing out the periphery, you will see EUR tank because they've paid a heavy price without putting in the structural reforms for growth while weakening the core at the same time. Keynesian's are only good at one thing: BUYING TIME. Doesn't seem to matter what continent they reside, they keep telling everyone that the most important thing is buying time. If mind control was this easy, I would be sitting on the throne of Middle Earth and collecting my favors from Morgoth. LMAO!!!!!! 'Tis folly!

AynRandFan's picture

Everything is risk-on right now. You either gamble against the house and a debt crisis, or you stay out. Everybody has too much cash, and the rising level of risk will provide balance by winnowing the herd.

Yen Cross's picture

 l\Look for eur/aud  buying as ( Dutch, M/E,German banks are playing) Australian (10 year/yields).

   If I am buying sgd/gbp, to short every night. If you look @ CYN/USD ,China has been devalueing.

  This sounds complicated. China wants to maintain a"P{EG).

       There will be some key currencies, Korea, Indonesia, S.E. Asia, that China has to deal with!

Yen Cross's picture

  Tyler, please?  That hidden (TROIKA) meeting.  If Draghi was a "rectum" , Nowotny is a " Black Hole"!

  Nowotny was the "face plante" , For " Draghi/Queen"!     I'll neveer forget watching the ( GBP/USD) go parabolic, as every M/E asshole oil baron, shit  himself!

Yen Cross's picture

 OK. The Samsung Galaxy s-3 kicks ass!   Am I wrong? That 4-g tool is Sweet, and )APPL)  knows it!\

   Larger Hi Def screen, Beetter Milli /Amp Battery. Easier to (ROOT).

                      The S3 Galaxy beats the (i-wanabe) hands down!     The i-5 doesn't have screen size!


falak pema's picture

whats a billion for being a copy cat...peanuts.

Yen Cross's picture

 Once again Tyler. Divergent- Idioacy ( Detroit ' mispel' style)

  Fuch it. TOP GEAR/ Test TRACK!

orangegeek's picture

US Dollar index down this week but remains in its channel.  For the US Dollar to continue to fall, the Euro must continue to rise (weighting).


Not much upside left in the Euro.

intric8's picture

However this resolves, the joke will continue to be on the US taxpayer. We'll all be hiding out in caves one day with canned goods and a shotgun. I occasionally lament about how our young children won't have much of a future. Till such time, at least they can take up interesting pastimes, like starting a time consuming blog to express their feelings.

dcb's picture

interesting read. in a way I look at udn/ (do;;r bear) and uup (dollar index) and was looking for someone to address why european stocks were do far above the value for udn. I saw this big disconnect and knew something was wrong.

also I chart both, and for some reason (they are suppussed to be inverses, the trend lines knpow are different and I can't figure out why

On udn (dollar bear we hit my target top inflection point on thursday. so if it breaks below last weeks low look out.

on uup the rally in the euro has a bit to go. Meaning I can't understand this discrepancey.

of not all the other macd indicators are turning down strongly (although I have seen the hfts keep moving the market up before no matter what the indicators say.

now on the head and shoulders formation we broke beloew the neck line, and each time this has happened in three yeas some central banker makes a statement. this time draghi.

I think the rallly had to go to the point it was set by the algo.s but almost on every chart I have thursday was a big day

All is chosen's picture

Bored with waiting. Update: "Is The EUR?"

Debugas's picture

if Greece exits then EURO will be Risk Off

Fred Hayek's picture

Could we please get away from this insistence on the risk-on or risk-off false dichotomy?