Speculators build record euro short position as Greek woes escalate

The latest commitment of traders report, issued by the CFTC, showed International Monetary Market (IMM) leveraged funds increased their bets against the euro to 194,983 contracts by May 15. That was up from 166,483 contracts in the previous week, taking the value of their short positions to a record $31 billion.

Chris Turner, head of FX strategy at ING Financial Markets, says a weaker euro is a conviction call among investors, as the prospect of a Greek exit from the single currency throwing the eurozone into chaos heightened.

“There does seem to be sufficient risks to justify such a large position,” he says. “And the floodgates could well open were EURUSD to break below $1.2600.

“Presumably, most contingency planning, which is now being undertaken by policymakers and the market alike, will conclude that the euro will fall heavily.”

One factor that argues against a sharp drop in EURUSD is the fact that funds have built up heavy short positions, heightening the chance of a short squeeze in the currency pair.

However, Greg Anderson, strategist at Citi, points out that leveraged funds also added to its long positions in the euro, which climbed to a notional $11.5 billion from $9.8 billion. That took the net short position of leveraged funds to a record $19.5 billion.

“This record net short position suggests that IMM leveraged funds would be hurt badly by a bounce higher in EURUSD from the rough $1.2730 level at which the survey was taken,” says Anderson.

“However, we point out that longs are big enough that a move lower would also spread some pain.”

Meanwhile, heightened risk aversion drove haven demand for the dollar, sending the value of the net long position in the currency to a record high of $28.2 billion, surpassing the previous peak of $23.0 billion reached in January.