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.