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Short Euro Liquidation

Here’s a chart I got courtesy of Andy Lees of UBS about eight hours ago. It shows net speculative exchange-traded longs in the Euro.

Andy says:

The net selling has now been slightly bigger than during the initial 2008 part of the credit crunch. What is interesting though is that in 2008, 70% of the selling was  liquidating longs, whereas this time 70% of it so far has been initiating shorts. This is effectively therefore, a much bigger risk position than in 2008, and should mean a more aggressive snap-back when it eventually comes – (in 2009 the euro reversed 76% of its fall).

I think the point is that, while there is currency revulsion now at work and the euro is selling off as a result, there is bound to be some serious short covering.  Since then, there has been a pretty sizable rally in the Euro. And while the huge uptick in EURUSD this morning was credited to the (false) rumour that the Greeks might consider leaving the Eurozone, clearly there was some short covering going on.

Andy’s note about a 76% reversal of the 2008 down move in the euro suggests that we may eventually see a much larger reversal in the Euro than we have seen to date. And although I recently noted that the Euro was still overvalued on a purchasing power parity basis, nothing goes down in a straight line.

Bloomberg notes Jim O’Neill advises buying Euros for just this reason in the video below.

Just sayin’.

About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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• Euro Losses Accelerate As Germany Bans Some Short-selling 18 May 2010
• Long Dollar Liquidation Featured 29 Mar 2010
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