Euro-dollar hits yearly high | Main driver is short covering of speculative positions

The EURUSD currency pair hit a high for the year yesterday. This is not a bad performance for the Single Currency, which was touted as a candidate for parity with the US dollar not so long ago.

Worries about Greece remaining in the Euro zone and / or the EU itself seem to have receded into the dim, distant past. Even a snap Greek general election, the third this year, has done nothing to dampen the rise and rise of the Euro. And, let’s face it, if it were not for the publicity surrounding the recent Greek / EU / IMF negotiations, who outside of that country, and a handful of political pundits, would have known who was in power there, and for how long their government lasted?

Main driver is short covering of speculative positions

While a rush to the safety of a currency that has proven its resilience over and over is one factor in the rise of the Euro, caused by yesterday’s rout on the equity markets, it would not be good for Euro bulls to get too complacent. The forces that will propel the Single Currency to the downside are still in place. Deflation fears, which will almost certainly be met with more Quantitative Easing on the part of the ECB (just as soon as Senor Draghi and his colleagues are back from their hols) are still very strong and will ensure that the downward tendency remains extant.

The market has come to the conclusion that interest rate rises in the US are placed somewhat on the back burner, due to the dovish (confused?) nature of the most recent FOMC meeting minutes to be released. But even this assessment may turn out to be incorrect.

In the meantime all those hedge funds that had placed massive bets on an early start to rate rises in the US are forced, for now and as a bye-product of the turmoil in Chinese equities, to unwind those wagers. The same institutions had created a very sizable imbalance to the short side in the Commitment of Traders (COT – see illustration above) figures, which are a measure of the positions that are taken on, both long and short. It is the covering of these short positions that is propelling the current rise in the currency (covering a short position involves the purchase of the underlying asset, which gives rise to upward pressure on the price or, in this case, the exchange rate for EURUSD)

It may not last.