About exactly 3 years ago, the Euro was on a tear. Versus the U.S. Dollar, it was hitting multi-year highs near 1.40, having rallied some 17% over the prior 22 months. In the Euro futures market, the “smart money” Commercial Hedgers had adopted a net short position for one of the few times during the prior 3 years. Of course, these Hedgers are called “smart money” due to their proclivity for being correctly positioned at major inflection points. Sure enough, the Euro was indeed at such an inflection point. It began falling immediately and has not seen those levels since. Nor have Hedgers been net short since – until now.
Over the 12 months following that 2014 inflection point, the Euro would be sliced by 25% – a huge move by currency standards. The move obviously rewarded the Hedgers’ net short position handsomely, once again validating their “smart money” moniker. By March 2015, conditions became ripe for a bottom in the currency, as we noted in several Charts Of The Day and blog posts that month(e.g., March 4 and March 13).
One such condition was the fact that, in a reversal of their May 2014 position, the Commercial Hedgers, or “Dealers”, had actually moved to a record net long position, as our chart at the time pointed out.
This represented an enormous potential tail wind, or fuel, for the currency (via the counter-party Speculators having to unwind a record net short position), should it begin to rally. As it turns out, March 13 marked the precise low in the Euro, at just south of 1.05.
Note that I did not say that it began to rally.
Fast forward 2 years. What did the Euro do with all that potential fuel? Well, the low for the currency in March 2017 was – just south of 1.05. And the interesting thing is that, during the 2 years of the Euro going nowhere, the Commercial Hedgers have unwound their entire record net long position of 274,000 contracts. That is like burning through an entire tank of gas while driving your car on cement blocks.
And, as noted in the first paragraph, these Hedgers have actually moved to a net short position in Euro futures for the first time since that May 2014 top.
With that said, the Euro has gained some key technical ground over the past few days. Could the currency finally be launching its long-overdue rally. Or will the spent fuel in the futures market turn into a headwind for the currency?
The Guggenheim CurrencyShares Euro Trust (NYSE:FXE) rose $0.13 (+0.12%) in premarket trading Wednesday. Year-to-date, FXE has gained 4.99%, versus a 7.40% rise in the benchmark S&P 500 index during the same period.
We lay out our thoughts on the prospects for the Euro in a Premium Post at The Lyons Share, including our analysis of the futures positioning as well as the key levels to watch in the Euro. If you’re not a member of The Lyons Share, now is the time to join us as our Spring Sale is going on for just a few more days.
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.