Last week we warned of the risk (to the upside) from positioning in EURCAD almost regardless of the outcome of the critical event risks. Friday’s blow-out rally could be just the beginning.
Last Wednesday, I took a look at the market positioning ahead of US FOMC meeting and what QE3 might mean for the market from a positioning angle. (Here is the original post.) Friday’s market action bore out this risk as EURCAD exploded higher on the back of a further Euro short squeeze and as the Canadian manufacturing sales data had the crowded CAD longs taking some profits. There may be much more to this trade in the weeks ahead as CAD longs built significantly last week.
Chart: EURCAD
The great squeeze on Euro shorts in the summer of 2010 saw just short of 2,000 pips of covering before the squeeze finally ended. This time around, the positioning has been far more extreme in EUR shorts and CAD longs and what we have seen unfold so far could be just the beginning of an epic squeeze, particularly if we see a risk off move and/or if the USDCAD move below 0.9800/0.9850 fails to hold. A thousand pips of further upside potential from here could be a conservative estimate considering we’ve only moved a little over 600 pips thus far. Stay tuned.
John J Hardy,
SAXO BANK