EURUSD Weakness Has Caused Short Position Spreads to Increase
You could argue that the failure of the US Dollar Exchange Rate, or the EURUSD, against the British Pound Sterling, or the GBPUSD, has been a long-term process. So, why is the EURUSD now beginning to show signs of weakness? This article will outline what is happening and discuss the implications.
It can be quite easy to overlook the fact that the U.S. Dollar Exchange Rate, or the USDUSD, has been very weak against the Pound Sterling since the onset of the global financial crisis. This is an extremely important detail, because it can be used to predict where the EURUSD might go next.
The European Union and the European government have started to "put their foot down" in various areas, and the USDUSD is currently experiencing some downward pressure. It's too early to say for sure, but the result may be to put upward pressure on the EURUSD. What will this mean for traders?
It will likely mean a continuation of the strong appreciation in the value of the currency. This in turn means that the value of the currency will rise. As a consequence, prices and margins will rise for imported goods. At the same time, the value of the currency will fall, pushing down the price of imported goods.
This sort of situation will not be favorable for consumers in many countries, particularly those with relatively weak economies. In fact, it is quite possible that the gap between the price of goods and the price of imported goods may start to narrow, even as the gap between the value of the currency and the value of the goods increases.
The situation will be exacerbated by the relative strength of the Pound Sterling, relative to the Euro. This in turn means that if a country's economy is in a severe downturn, and is facing a combination of high unemployment and falling wages, then the country's balance of payments problems will be exacerbated by the strength of the Pound Sterling.
It is my belief that the trend that we are seeing, not only from large investment banks but also from retail investors, is that there will be an increase in the number of short positions in USD, as capital tries to get rid of its USDUSD investments. I expect these short positions to increase in a major way, and this will lead to a further weakening of the USDUSD.
Over the longer term, we could see a potential short squeeze of the USDUSD as capital starts to think that it has an adequate amount of cash. This is even more likely to happen if we have a major economic setback, like the Lehman Brothers debacle. The same goes for the Euro, although I suspect that even with the Euro being the "sweet spot" of the currency markets, that the USDUSD may be the best-performing currency in recent months.
We also see that we have very low liquidity and very little information in the short positions. Therefore, this leads to very little knowledge about the quality of the currency pairs, and some risks are taking place. But, as far as the USDUSD goes, I don't think we are really under any real pressure at this point.
Why is this? Well, the collapse of Lehman Brothers, which was an accident waiting to happen, has wiped out a great deal of money for those that held USD and has made EURUSD very attractive.
Now, the Euro, despite recent problems, is a much stronger currency than the USD, and thus, the question of which currency will have the edge, remains unanswered. If you are holding EURUSD, you should do whatever you can to hold your position and just wait until a recovery takes place.
The amount of money that the short positions are providing means that they will continue for some time. You could probably make money by holding EURUSD, but the more interesting question is when you would sell.