When is the last time the markets have heard anything bullish about the euro? The perils of the single currency, the sovereign debt crises, the underfunded European banks, the lack of a lender of last resort, and repeated stories Greece is about to leave the euro, are all repeated and embellished by the bears.
We, too, have been have been euro bears for a lengthy period, but have we gotten to the point where the bulls have capitulated, and the bears have doubled down on their positions? Granted currency markets are usually trending markets. and often they last a long time. Despite the perils of picking a reversal, we think there are some reasons for the bears to be cautious.
To begin, the bear side of the market has become very popular. The latest COT Report showed in the futures and delta adjusted option positions, the speculative bears had increased their short position to 219,642 contracts, a recent record. Speculators also have an expanding short in the Swiss Franc. Since the SNB pegs the SF to the euro, the large short in the SF is really a proxy for a short euro. The open interest in the SF is much smaller than the euro, but the specs are short 93.7% of the OI in that market.
So far, the bears have the money, but with so many on one side of the market, what would happen if the sentiment shifted?
The European debt mess continues to evolve, and perhaps there is a lot more to the down side, but the trade is lined up very short.
If government intervention occurs to try and stabilize price prior to the Greek exit, i think it's safe to assume that their will be a short rebound in price (maybe 2-3 days, a week max). The bears can't always win, if they did we would run out of market at some point.