Moves by speculators don't always foreshadow euro shifts

Mon Jan 28, 2013 11:43am EST
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NEW YORK Jan 28 (Reuters) - Betting on a market turn based on speculative positioning is dangerous, as investors watching big short bets in the euro have found in the last few years.

Conventional wisdom in financial markets holds that prices are likely to reverse when enough speculators bet on a move in one direction. But a Thomson Reuters study of record net short bets against the euro from May 2010 through June 2012 shows little consistency in market moves in that currency.

Someone betting on a rise in the euro a day after data showed a record net euro short position would have lost money on eight occasions out of 11 such instances in that time period.

It is scarcely better for a return a week or a month later, with a profit in only five instances a week after a record net short positions or in only six instances of 11 such events a month later.

It suggests reading the weekly Commodity Futures Trading Commission data on market positioning, widely followed by the $4 trillion foreign exchange market, is more art than science.

"I would not necessarily expect a record net short position to be the best indicator of near term direction of a currency," said Michael Woolfolk, BNY Mellon currency strategist in New York. "The move is probably overdone and foreign exchange markets are notoriously rife with overshooting to the top and downside."

The euro accounts for more than half the daily volume in the total foreign exchange market and at the height of the euro zone crisis drew the biggest amount of speculative positioning. The data released on Friday is current through the Tuesday of that week, meaning the figures are delayed, making it likely that positioning has changed.

Net short positions against the euro hit record highs in May 2010, December 2011, January 2012 and then again in May and June 2012, typically coming in bursts of consecutive weeks. But price action indicates no evident pattern following that.

In the two weeks of record net euro shorts in May 2010, the euro was down one day, a week and a month after the data was tabulated. For the week of Dec. 13, 2011, the euro fell a day after the data was released, but it was higher a week later, and then again down a month after that.   Continued...