How to Spot the End of the Great Euro Squeeze

The euro climbed another 160 pips against the US dollar on Wednesday after a disappointing ADP report. It was easily the best performer while the US dollar lagged. The Australian jobs report is up next. Our Premium EURUSD long entry at 1.1210 is over 150 pips in the money.  EURGBP and AUDNZD longs are also well in the money, while AUDUSD is at a loss.

The rally in the euro hit a fresh high since Feb 25. It's risen in 12 of the past 17 sessions in what has become a painful squeeze.

We warned for weeks about the overly crowded nature of euro shorts, citing the buildup in the CFTC COT report. But a market can remain crowded for extended periods and there is no telling when a squeeze will come. There is also no easy way to tell when it will end.

A few things to look for:

Signs of capitulation. Look for an outsized move on relatively mild news. Today it was ADP at 169K compared to 200K expected along with some positive murmurs on Greece. That's almost qualifies.

Wait for analysts to capitulate. We haven't heard Wall Street strategists give up on calls for a 95-cent euro yet. Also look for predictions about extreme levels on the other side, like 1.20 or 1.25.

Let the market flatten out before picking a top. Markets sometimes have 'V-shaped' turnarounds but they're hard to sniff out and there will be plenty of time for shorts once a reversal back lower is confirmed.

Finally, keep in mind that this move is as much about the US dollar as it is the euro. It hasn't been a 'euro-short' trade as much as it's been a 'EUR/USD-short' trade. The EUR/USD rally won't stop until US data begins to improve.

Watch the bond market. Another rout took place on Wednesday. That was where the reversal began and that's where it will end.

Overall, EUR/USD is back to the level where it traded before the ECB announced a sovereign QE program on Jan 22. One of the things that gives us confidence that the downtrend will eventually resume is that German Bunds yields can't continue to rise with the ECB buying 60 billion euros of bonds a month. But squeezes can last longer than many expect, especially in trade as crowded as EUR/USD.

Looking ahead, the Australian jobs report is due at 0130 GMT. The retail sales report was close to estimates yesterday and brushed aside but kiwi Q1 jobs were extremely weak. The consensus is for 4.0K new jobs and the unemployment rate rising to 6.2% from 6.1%. The better trade is probably buying AUD; a strong number would confirm that the RBA will remain on the sidelines, while a soft number would be brushed aside as markets wait for the impact of Tuesday's cut.