Waiting for the short squeeze
EUR USD (1.2735) A predominance of relatively positive news yesterday including Fitch’s announcement that France may not be downgraded this year after all, and that Germany’s triple-A was safe, helped euro sentiment. The tone of the Merkel-Sarkozy summit, which for the first time in a while hinted at the need for growth-inducing stimulus rather than just austerity, could also have been construed as positive. Most importantly, though, earlier data about record euro short positions created a market expectation that a short squeeze could be in the making. However, the price did not even reach our first hurdle and volatility remained low, so some investors may have already been persuaded to sell and others may still be waiting for the short squeeze to unfold. We fear that the latter may have set themselves up for a disappointment. The stream of positive euro news may come to an end very soon. For instance, the issue of Greek PSI is far from resolved and Fitch has never been the most aggressive of the Big Three rating agencies. As for the huge short positions, our view remains that the euro weakness is driven more by capital outflows than by the speculative selling reflected in the futures markets.
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