Is The EUR Short Squeeze Threat Exaggerated?

Tyler Durden's picture

Every hour of every day we are told by the 'repeaters' that sentiment is terrible, it's all priced in, market's gotta go higher. Nowhere is this more true than in the constant diatribe of commentary on the EURUSD exchange rate and the 'massive build-up of short EUR positions'. However, as Citigroup's Steven Englander points out - shushing the bullish mob - that "a closer look at the data suggests that the investors with the biggest shorts seem to have built up their short positions at much higher euro levels, so the short squeeze risk may not be as great as aggregate positions suggest."


Citigroup: How much EUR positioning vulnerability?

Both CitiFX PAIN and CitFX Access show significant short EUR positions, suggesting pretty significant vulnerability to a short squeeze (Figure 1). Our PAIN index suggest the largest EUR short in two years and out CitiFX Access positioning index suggests the largest EUR short since the data began in the middle of 2011. However, a closer look at the data suggests that the investors with the biggest shorts seem to have built up their short positions at much higher euro levels, so the short squeeze risk may not be as great as aggregate positions suggest.

Figure 2 shows the eight sub-indices of the CitiFX Access platforms (we omit the details of which funds go into each index since our objective is to build a broad picture of where the pain level is). All of these sub-indices are indexed to June 29=100 since that is when the latest round of EUR weakness began. The sub-index showing the most dramatic correlations with EUR weakness (CEXTI5, the blue line) has been tracking EUR weakness since late June when EURCAD (the bright yellow line) was 1.29  and  EUR (the heavy purple line) was around 1.2650. So the big in the money investors have their positions at good levels.

Other indices have shown more muted gains, but their correlation with EUR (or EURCAD) is less pronounced, so while the entry levels are not as dramatic, the positions do not seem as big. In Figure 1 both the positioning indicators show significant positions overall accumulating in the first half of July, so it seems likely that the extreme pain level for EUR is no lower than 1.23 and for EURCAD no lower than 1.25.

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The Monkey's picture

Gary Shilling: Euro will move to parity with the dollar.

Nothing moves in a straight line though. Very short-term, anything can happen.

Peter K's picture

However, sometimes they move in long vertical lines :)

101 years and counting's picture

no shit.  there was a huge short at 1.35 and this site warned of the potential short squeeze.

the question always is:  not how many are short, but WHO is short.


Bohm Squad's picture

...and we should be led to believe these big shorts at much higher entry will hold their position while massive profits shrivel?  I don't agree with that logic.  That and prices are determined at the margin, so large existing positions will have to defend marginal willing are they to do that if there's so much a whiff of more QE?

The Monkey's picture

Agreed. We are still range bound and the tie-breaker (until event risk is dealt with one way or the other) is going to be sentiment. The Fed inherenty is dollar and VIX negative, so path of least resistance is up for equities until the Fed has laid it out.

VIX is expensive here, which is scary. The Fed is insuring long positions instead of investors, making another very large crash on event risk possible.

What a bunch of idiots.

Stoploss's picture

1.28 is the number.

FieldingMellish's picture

It isn't over until GS tells its clients to go short EUR big time. Then the bottom is in for sure.

ATG's picture

EUD, Gold and TNX green so we bot more GM and SPY calls today as well as before yesterday's close.

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Bohm Squad's picture

I think a lot of it depends on what Ben's going to do next.

alien-IQ's picture

Europe closed now...and as we all know that means it's "shank the dollar and ramp the Euro" time.

Watching 1.2150 resistance.

Peter K's picture

The best is 1.4200, and enjoying the ride, baby :)

ptolemy_newit's picture

The European Union will survive smaller and stronger with the Euro at 1.56!  There is a balance required between the USD (flight to safety), the Asia giant and a European empire to control the regions of the NWO.    A Euro at 1.56 will be accepted by the German and American export equilibrium.

When the smoke clears around Europe and the reality of a broken (equally corrupt systems) the USD will lose strength

Yuan at 5.3 can support China's migration to higher end export products.

Axis of no evil you could say!

GeoffreyT's picture

'Analysis' of the type outlined in this report really annoys me - it's the type of thing that would get done by someone who has no idea how markets work.

It is not the average short that gets their nuts in a vice during a squeeze, and it's not smart (early) shorts. It's late, highly-leveraged, marginal shorts. It does not take a vast number of squeezed shorts (particularly the 100:1 leveraged 5th-decimal-place-chasers in ForEx) to cause markets to unzip.

If you look at CFTC Commitment of Trades data, it breaks out by whether the trader is a commercial, a hedger, or a non-reportable (with some other granularity that's not important right now).

If you concentrate on the 'little fish' - the Non-Reportables - and you plot "Non-Reportable Longs" divided by "Total Non-Reportable", you get what I call the "Dumb Bull Ratio". This is a very good contrarian metric (although sadly only in the reart-view, due to the CFTC's delay in producing timely CoT reports); the DBR 'Granger-causes' declines when it gets too high (in EC, ES, GC and CL), and bounces when it gets too low. In fact if the current DBR is known, it outperforms almost all other indications of overboughtness and oversoldness (it's about equally predictive as CCI divergences).

It's of little use practically, because eDBR for the current period is not known: each Friday's CFTC CoT relates to the prior week.

A reduced-form forecast does OK at predicting DBR extremes if the prior week's CoT was 'near' an extreme and the market has continued in the direction of the trend. (In such circumstances the DBR is much more likely to move to an extreme in the subsequent data - setting up a contrarian trade bias in the following week).


TL;DR... the research conclusion-  that short positions were being built in size at higher levels and that therefore a squeeze won't work - is shit, because squeezes snap the backs of small, spec, leveraged numpties - the 'Dumb Money' who gets in late and is almost always wrong. (You know - the dummies who were shorting Gold down in the 1560s... just as I was yelling 'Buy' - see and note that EURUSD rose 90 pips after that post before another downleg to lure in some more late dummies).