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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