Speculative bets against the euro this month have taken place on an unprecedented scale and yet the currency somehow continues to defy gravity against the dollar.
Statistics published Friday by the U.S. Commodity Futures Trading Commission showed a record number of net bets against the common currency in the week ended Jan. 24. This happened as talks between Greece and its private-sector creditors dragged on and as economic indicators reinforced expectations of a downturn in Europe.
It was the fifth straight week in which the data showed a record negative bias among futures traders against the euro. At $28.1 billion, the net balance was also 10% higher than in the previous week and had more than doubled since September.
And yet, the euro has been mostly stronger in 2012, bouncing off a 16-month low near $1.26 in mid-January versus the buck to trade above $1.31 on Monday, leaving currency investors scratching their heads.
Indeed, any outstanding negative bets made against the euro since Dec. 13, when it was last trading around current levels, are almost certainly under water.
So why is the euro continuing to hold up in the face of such seeming unpopularity? In large part, it is the fact that the regularly quoted CFTC numbers don't paint the entire picture. Investors and strategists say the CFTC positioning data shouldn't be used solely as a guide for the wider $4 trillion-a-day global foreign-exchange market. That's because they cover only speculative trades on the Chicago Mercantile Exchange and therefore represent only a part of overall activity.
The fact the CFTC weekly report points to a high number of negative euro bets doesn't necessarily mean the rest of the market is similarly ill-disposed, analysts say. Some strategists suggest that speculators may have taken advantage of the recent squeeze higher in the euro. That has allowed them to increase the size of their negative euro bets at a more attractive price.
Others suggest that some speculative traders holding short positions haven't joined the recent rally because they feel in the longer term the euro should be trading lower.
"Speculative participants are very much looking through the recent rise in euro crosses and have held on to their short positions. They are looking towards the weak euro-zone growth outlook and further European Central Bank monetary-policy easing going forward," said Michael Sneyd, currency strategist at BNP Paribas in London.
Other gauges of currency-market positioning suggest negative euro bets aren't as extreme as the CFTC data make out. For example, custodial banking giant BNY Mellon Corp.'s client flow, which is based on an analysis of more than $25.8 trillion in assets under BNY Mellon's custody and administration, suggests its customers have neither increased nor reduced their euro positioning since the start of the year.
"I don't think there has been a tidal wave of people buying euros. People are sitting on their hands," said Simon Derrick, senior currency strategist at BNY. "The fact that positioning has remained unchanged through January indicates how labyrinthine the different negotiations are," he said, with reference to Greece's debt-restructuring talks and euro-zone fiscal compact.
A gauge of positioning that looks at the options market also shows less-extreme sentiment against the euro. Risk-reversals indicate how much the market is biased one way or another in terms of "put" and "call" options.
"Risk reversals are actually showing the opposite of what the CFTC data have been indicating. They were at extremes in November, but this has been unwound. This suggests that speculators are selling euros via spot than through options," Mr. Sneyd said. He added that over the past few years risk reversals have been a leading indicator for turning points in the euro's exchange rate against the dollar.
That points to a continued rally for the euro, placing even more bets against it under water.
read more: Olympus Wealth Management
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