Caught Short Of The Euro?

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Just for a change it may be best not to get involved in the Euro/Eurozone/European Union quagmire. Instead, the theme here today is the recent rise of the single currency and the sentiment attached to the cross versus the U.S. Dollar. Indeed, from trading perspective over the past two years there has been only one fundamental view (unless you have had a lobotomy or represent the ECB / the Brussels gravy train) to take regarding which direction this cross is heading for.

y, and even the suckers and their friends the muppets have been betting on the collapse of the Euro towards parity with a dollar, with a reasonably chunk of this motley brigade assuming that this wretched beast will disappear altogether. What has been even more interesting is that for long periods the open positions of traders were 80% or even 90% short. Even now after a 10 cent move higher in the past 7 weeks at IG Index 71% of clients are short.

But if you look at the influences on them, this is hardly surprising. As someone who has attended a series of trading seminars and events over the past couple with experts of various persuasions in terms of being technical or fundamental, or just plain clever, I do not remember even one person either backing the idea of the euro, or being in favour of buying the euro as a currency at time or any level – simply no debate. The only explanation is that no one wants to have it on their CV that they said buy the Euro just before its split back into the respective national currencies.

While it may of course be the correct that the big picture bear opinion is the one which proves to be correct, it is not always relevant to day-to-day trading, or even over a few weeks or months. One of the most stunning aspects of the financial markets since ECB President Mario Draghi said that he would do “whatever it takes to save the Euro” has been the rally from $1.21 in the currency from the time when he said it. This process has of course been accelerated by QE3 last week.

But the reason for this article is that Draghi’s warning to speculators not to be short of the Euro on August 2nd was the first time in my memory (nearly 40 years) that anyone not from an investment bank / financial markets guru / fund manager has ever delivered a piece of trading advice – and got it right. Indeed, it could turn out to be the trade / squeeze of the year, if as I suspect hardly anyone took heed of it, and actually did the opposite on the basis that you should normally do the opposite. After all, George Soros “breaking the Bank of England” 20 years ago was deliberately going against the will of the Treasury in the way that shorting the Euro last month what would have been calling the bluff of the Draghi last month.

But if you are short of the Euro and hurting at $1.30 plus, it would appear that you are in good company. On August 18th it was announced that Lord Rothschild (via RIT Partners) had made a £130m bet against the Euro. Indeed, this could have influenced many traders to get on the bandwagon – one that they may still be riding currently. In the end it may come down to who you believe in more: Rothschild or Draghi?

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