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Speculative Currency Short Positions Decline

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Marc Chandler

NEW YORK ( BBH FX Strategy) -- The latest Commitment of Traders report from the Commodity Futures Trading Commission covers the week ending March 20.

Among the major currency futures, there was dramatic reduction of net short speculative positions. To appreciate how this was achieved is only possible by disaggregating the data.

The net speculative euro short position was cut to about 83,000 contracts from 99,300 the previous week. This is the smallest net short position since the end of February. In the previous week there was a decline of net short euro contracts roughly of the same magnitude. This was almost solely the function of shorts getting out. However, this week the establishment of new euro longs was larger (10,100) than the shorts exiting (6,300).

The euro's resilience in recent days has been impressive. It shrugged off the disappointing eurozone flash PMI that warned that the German economy may be sputtering.

Pressure in the eurozone is increasing, as reflected by the widening of spreads against Germany and the backing up of Spanish and Italian bond yields, and the widening of the U.S.-German two-year interest rate spread. The immediate range appears to be $1.3140-$1.3300, within the broader range of $1.30-$1.35.

Many participants are monitoring the formation of a potential head-and-shoulders pattern in the euro. A sustained move above the $1.3350 area will likely call it into question, forcing perhaps another round of short-covering and the establishment of new longs. Trend followers, however, note that the five-day moving average has crossed back above the 20-day moving average at the end of the week.

The net short yen futures position was slashed from 42,400 to about 25,800. It is the fourth week now that the net speculative position has been short yen. This largely reverses the rise seen in the prior week. Then long were cut in roughly as much as short were established. In the most recent week, it was a different story, new longs (about 12,600) dominated the shorts being cut (about 3,900).

Since the period that the CFTC data covers ended, the yen has been the strongest of the G10 currencies, appreciating about 1.6% against the dollar. The week ended with the dollar slipping below its 20-day moving average against the yen for the first time since early February. Although there does appear to be some portfolio capital repatriation ahead of the fiscal year-end, the impact on the yen itself seems marginal at best. Support for the dollar is seen just below JPY82. A break could see a move back toward JPY80.60.

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