Sunday, August 24, 2014

Euro is biggest loser from Jackson Hole | EUR trader short sentiment now at an extreme level

NB: Today is a holiday in London, the most important global centre for Forex trading. Low levels of activity can be expected in currency trading today as a result.

It is a general tendency of all central bankers to wish to lower the value of their currencies. They are not politicians, who must take the risk that ordinary voters, who experience a low currency in terms of increased prices at home and less value for their money when they travel, will react unfavourably. For the economist, a lower currency encourages exports and makes the management of monetary policy that little bit easier.

However, our central bankers are also, it seems, loath to take concrete action to ease pressure on exchange rates. They prefer to talk the currencies down or, as our Australian friends might put it, jawbone in order to get the effect they want.

In this respect, the master at this game at present must be Senor Mario Draghi, president of the European Central Bank. His comments at his regular press conferences following the ECB monetary policy statements have consistently resulted in a weakening of the Euro. There have been regular threats of some sort of Quantitative Easing (QE) in the Euro zone, but to date no action has taken place on this front.

His latest efforts in talking down the Euro have occurred at the Jackson Hole economic symposium, which wrapped up over the weekend. He said, once again, that the ECB may be ready to do more in terms of easing. He talked about the reality of the very low inflation the zone is suffering from, which is a negative for the Single Currency. And right on cue, the Euro is lower against the US dollar (EURUSD) this morning as a result.

Trader short sentiment in the Euro is now at extreme level

Continuous talking down by the ECB president has resulted in the largest level of trader short sentiment in two years, according to the US Commodity Futures Trading Commission (CFTC), which publishes Commitment of Traders data on a regular basis.

This now shows that there are more traders taking short positions (betting on a fall) on the Euro than at any time since the middle of 2012.

It is dangerous to follow the herd in a situation such as this. Such extreme positioning is setting the scene for what is known as a “short squeeze”, when a counter catalyst causes purchasing of the instrument that has the large number of shorts, causing the short sellers’ stop loss orders to be triggered. A stop loss on a short trade is a buy order, and so many of these being activated at once results in a precipitate rise in the asset in question, in this case the EURUSD pair.

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