Moves by speculators don't always foreshadow euro shifts

NEW YORK Mon Jan 28, 2013 11:43am EST

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NEW YORK Jan 28 (Reuters) - Betting on a market turn based on speculative positioning is dangerous, as investors watching big short bets in the euro have found in the last few years.

Conventional wisdom in financial markets holds that prices are likely to reverse when enough speculators bet on a move in one direction. But a Thomson Reuters study of record net short bets against the euro from May 2010 through June 2012 shows little consistency in market moves in that currency.

Someone betting on a rise in the euro a day after data showed a record net euro short position would have lost money on eight occasions out of 11 such instances in that time period.

It is scarcely better for a return a week or a month later, with a profit in only five instances a week after a record net short positions or in only six instances of 11 such events a month later.

It suggests reading the weekly Commodity Futures Trading Commission data on market positioning, widely followed by the $4 trillion foreign exchange market, is more art than science.

"I would not necessarily expect a record net short position to be the best indicator of near term direction of a currency," said Michael Woolfolk, BNY Mellon currency strategist in New York. "The move is probably overdone and foreign exchange markets are notoriously rife with overshooting to the top and downside."

The euro accounts for more than half the daily volume in the total foreign exchange market and at the height of the euro zone crisis drew the biggest amount of speculative positioning. The data released on Friday is current through the Tuesday of that week, meaning the figures are delayed, making it likely that positioning has changed.

Net short positions against the euro hit record highs in May 2010, December 2011, January 2012 and then again in May and June 2012, typically coming in bursts of consecutive weeks. But price action indicates no evident pattern following that.

In the two weeks of record net euro shorts in May 2010, the euro was down one day, a week and a month after the data was tabulated. For the week of Dec. 13, 2011, the euro fell a day after the data was released, but it was higher a week later, and then again down a month after that.

Later, in December and moving into January, the first three weeks of a series of five straight weeks of record net euro shorts, the euro fell both the day after and the week after the tabulation, but was higher a month later.

In the last two weeks of that five-week period, the euro was higher against the dollar a day, a week and a month later.

The data separates speculative market players from businesses implementing hedging strategies, who use futures for different purposes. Just because one market segment is short doesn't imply the other is also selling.

Reportable positions are broken into "commercial" or "non-commercial." A trader is classified as "non-commercial" if the trader is not using futures contracts to hedge or insure against losses in a position, and instead looks to profit from the speculation itself. Other investors most often watch these figures for clues on where the underlying rate may trade.

Ken Dickson, investment director, currency, at Standard Life Investments in Edinburgh, which has assets under management of $263.9 billion, said he looks at both groups of data "to ensure reasonable liquidity."

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