Could Record Low EUR/USD FX Spreads Signal a Reversal?

Posted on | May 25, 2012 | No Comments

Much has been said about euro weakness not necessarily synonymous to USD strength.

This shows in the latest charts of speculative positioning among forex spread betting 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 coincides with 2-year lows in the single currency. FX spread betting investors sometimes view such “extreme” data as a contrarian signal, suggesting a turnaround, or at least stabilisation in the 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 6 currencies (EUR, JPY, GBP, CAD, CHF and SEK), 57 percent 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 the 2008 crisis or the 2010 wave of Eurozone downgrades.

This could start turning macro-trading into a USD-centred environment and accumulate aggressive build-up in USDX positioning.

Please remember that Spread Betting and CFD Trading are leveraged products that carry a high level of risk to your capital and can result in losses that could quickly exceed your initial outlay. These products may not be suitable for everyone, so please make sure you fully understand the risks involved.

Spread Betting and CFD comments by Joshua Raymond, Chief Market Strategist, City Index.

The above should not be construed in any circumstances as a recommendation or offer to sell or recommendation or solicitation of any offer to buy any security or other financial instrument.

Neither City Index nor Spread-Betting.org warrant or represent that the material is accurate, complete, not misleading, or fit for the purpose which it is intended and it should not be relied upon as such.

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