The euro still has some way to fall

London: Short of hiring a small aircraft and trailing a banner reading ‘Sell euros, buy dollars!’ across the skies of Docklands, there’s little more that policymakers in Frankfurt and Washington could do to make the case.

And yet, trading the two currencies against each other remains a tricky task. Depending on who you talk to, the trade is either too popular, or not popular enough.

European Central Bank president Mario Draghi has cranked up the volume by saying any further easing this week would aim not only to prop up inflation, but to drag it up towards the official target “as quickly as possible”. Fighting talk, hawks be damned. The Federal Reserve, meanwhile, has more or less promised a rise in rates just before Christmas.

It does not take a genius to figure out that is a case for selling euros and buying dollars. Indeed, it is the number one trade in most banks’ 2016 outlooks. The exchange rate has already dropped, of course.

Still, it is odd that the euro is holding at around $1.06, rather than sinking to $1 or less. Right now, we are not even at the lowest point of 2015.

Ah, but traders are all already short euros, is one riposte. A quick look at the tally of bets compiled by the Commodity Futures Trading Commission backs up that idea. Funds have been selling euros consistently, and buying bucks, particularly in recent weeks. So euro sellers are all in, and if the usual year-end book-squaring occurs, many will close out their bets as Christmas approaches.

To a point.

Those CFTC numbers represent a very small slice of a very large market, and they tend to track the activities of trend-following technical analysis fans.

Taking a different measure, investors are nowhere near as heavily committed to this trend. This shows up in the Parker Index, which tracks returns made by currency hedge funds. It shows returns have sunk since March, and flatlined since October.

In other words, funds piled in to the last bout of euro weakness, but have shied away since.

Again, these numbers are partial. Still, they go some way towards explaining why the euro still shows a capacity to fall whenever ECB doves coo, and suggest the currency has further to fall, particularly next year.

— Financial Times