EUR Specs Pile Into Shorts, Latest Premium Ahead of Monday Asia

The euro edged higher on the day but talk of orderly defaults cut into the gains. Overall changes on the day were small, CHF was the top performer, followed by EUR; NZD and USD lagged. Fridays CFTC report showed USD longs jumping to a one-month high at the expense of the euro. Latest Premium Trades for Monday Asia (Sunday night) below.

The euro gained on rumours of ECB bond purchases and talk that the IMF could do more for European stability. But sentiment edged lower throughout the day, especially after a local press report suggested Germany was considering the possibility of orderly defaults beyond Greece.

Ashraf has been talking about the weekend general election in Spain for some time and on Friday the market is taking a more active interest, pushing Spanish spreads wider due to political uncertainty. The ruling socialist party is expected to cede power to the conservative Partido Popular but, as we have frequently seen, the honeymoon could be short. The (likely) incoming PM has promised to slash spending but has been vague on specifics, saying only that he will spare pensions.

The focus in the week ahead will shift to efforts to combat the US deficit. With just minutes to go in the trading day on Friday, second-tier ratings agency Egan Jones said it may cut the US debt rating if the budget super-committee flops. The FX is assuredly priced in a low probability of a budget overhaul and the bond market has not shown any concern. There is a risk, however, that a protest from the stock market could spark a short-term round of risk aversion later in the week, when it becomes clear that no deal has been reached or a the deal includes tax increases.

The S&P 500 closed flat at 1216 on the day but fell 3.8% on the week; the worst weekly performance in two months.

CFTC COT report

Speculators at the CME are holding a $10.1B net long position in USD, up from $6.2 a week earlier. The change was almost entirely due to a climb in EUR shorts to -76.1K from -54.3K. Sterling shorts increased to -32.8K from -29.1K. CAD shorts increased to -17K from -15K. AUD remains in a net long position but it was trimmed to 24.3K from 27.0K.

The long currency to make headway against the USD was the yen as the net long expanded to 33.7K from 28.0K. Surely the BOJ is keeping an eye on these numbers, they last intervened with net yen longs at 45K. The numbers cover through the close on Tuesday.

Weekly Charts

EUR/USD declined for the third straight week, eliminating the tentative positive signals late last week. The path lower is clear, especially on a break of 1.34 but given the extremely negative positioning evident in the CFTC positioning, a short-squeeze will remain an ever-present threat.

GBP/USD broke below the lows of the past three-weeks, which signals an end to the recent retracement phase. We may see a re-test of 1.5868 in the week ahead but the 3 cent drop since Monday indicates that rallies are to be sold.

USD/CAD looks to have broken out on the upside, closing the week above 1.2066 to put the finishing touches on a sloppy inverted head-and-shoulders pattern that targets a retest of 1.0650. A similar pattern targets the recent lows in AUD/USD.

The reversal in WTI crude confirms the Canadian dollar bias. Oil surged above $102 only to change course and close the week lower at $97.40, creating a spinning top on the weekly chart after 6 weeks of gains and signalling the potential for a near-term tumble.

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