Last Thursday the euro staged one if its largest one-day percentage gains on record, rallying more than 4% against the US dollar in less than eight hours.
The decision of the European Central Bank (ECB) to extend its bond purchase program by an additional six months, along with a 10 basis points reduction to the overnight deposit rate, stunned markets expecting a more aggressive policy response from Mario Draghi and the ECB governing council.
Not only did the decision shock markets, it likely contributed to substantial losses for many currency traders.
As this chart from ANZ reveals below, traders went into last week’s ECB meeting carrying the largest number of short positions since April this year, according to data released by the US commodity futures trading commission (CFTC) on Friday.
A short position indicates that traders have sold a particular currency – in this case the euro – in anticipation of further decline in the currency ahead. The CFTC data provides an aggregate balance of speculative positioning across numerous currencies, along with commodities and interest rate futures.
The data portrayed in the ANZ chart is from the close of trade on December 1, two days before the ECB governing council met.
With the ECB doing less than the markets had anticipated, and speculative short positions in the euro at seven month highs, the euro ripped higher on the back of short covering, something that eventuates when traders are forced to buy the currency they are betting against in order to limit trading losses.
As the hourly chart from Investing.com reveals below, the degree of short covering was likely substantial, contributing to the euro rising from 1.0540 to 1.0980 against the USD in the hours following the ECB announcement.
Clearly there was a lot of pain felt by those who were betting against the euro. Markets will find out just how much – at least based on net positioning – when the CFTC releases its next positioning update on Friday evening this week.
It’s almost certain to be plenty.