Euro amp USD Positioning Extreme or Normal

Much has been said about euro weakness not necessarily synonymous to USD strength. This is shown in the latest charts of speculative positioning among futures traders in the Chicago Mercantile Exchange where the number of contracts net shorts EUR/USD hitting an all time high of 174,000 contracts.

The new record high in net EUR/USD shorts (shown as new low in net positioning in chart) coincides with 2-year lows in the single currency. Traders sometimes view such “extreme” data as a contrarian signal, suggesting a turnaround, or at least a stabilization in the trend prevailing trend.

But there is no such extreme positioning in the US dollar index, where the number of net longs reached 17,442 contracts, well below the record 46,923 contracts reached in January.

Note, the US dollar index, is basket against six currencies (EUR, JPY, GBP, CAD, CHF and SEK), 57% of which is dominated by the EUR. It can be argued the reason that open long interest in USDX is relatively calm is due to the deterioration in USD against JPY. Yet, USDX is already hitting 2-year highs at 82.46.

Profit-maximizing futures traders (traders and CTAs) seeking opportunities with sufficient upside potential may view the relatively low “long” interest in USDX as a partial argument for adding to existing longs, which could potentially extend USD to the 86-87 level. Today’s release of the US consumer sentiment survey hitting the highest level since October 2007 may not agree with last week’s release of the Philly Fed survey dipping to its worst since summer, but does signify some strong sectors in the US. A flight-to-safety reaction into the US dollar from a Spanish state debt moratorium (as was in Brazil in 1998) or more inconclusive Greek elections could well lift up USD as was the case in 2008 crisis or the 2010 wave of eurozone downgrades (see red USD chart). This could start turning macro-trading into a USD-centered environment and accumulate aggressive build-up in USDX positioning.