Daily Brief – Unkind history

Unkind history

Sure, a day might be a long time in politics. But, in markets,10-years is a long time too. That makes the fact that net-short Euro positioning has now hit a 10-year high all the more impressive. Whilst France and Macron struggle with mounting problems, short-Euro positioning continues to build. As of the last CFTC report, the non-commercial futures positions sit at circa $22bn in notional value, or a net 137,000 contracts against the Euro.

History beyond that ten-year time frame does show us positioning can extend further. Throughout the years of the European sovereign debt crisis, net-short Euro positioning was even more severe. However, most people would also argue the stimulus was significantly bigger too. A recovery in Treasury prices in past sessions has stemmed outflows from the Euro and created a weak support level around the 1.12 mark in EURUSD. It is unlikely to take much to break this threshold and, in particular, if the market loses confidence in the ECB to deliver three hikes by the end of 2027, the Euro could be extremely vulnerable.

When positioning becomes this pessimistic about a particular currency, the risk often tilts towards short covering. However, given the headwinds facing the Euro at the moment, that conversation seems unlikely to enter the narrative anytime soon. The civil unrest mounting in France is one such headwind. Even looking beyond that risk, before every French Presidential election over the past 15 years, the Euro has lost value in the two preceding quarters. Bearing in mind that the Euro has existed for less than 25 years, that’s a fairly convincing precedent.

Discussion and Analysis by Charles Porter

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