If there was ever a chance for the Euro to take advantage of near-term conditions, the moment may be ripe for the elusive Euro short covering rally. The fuel here, of course, is the stretched futures market positioning.
After the ECB’s stress tests revealed that 25 banks failed to meet the standards, but after 12 covered their capital shortfall, only a €9.5B hole remained in the balance sheets – much less than the market expectation in the low tens of billions.
If sovereign QE is coming, it is probably being pushed back later into 2015. The recent uptick in Euro-Zone data speaks to the stabilization ECB policymakers were hoping for after their successive TLTRO and ABS-program launches. The Citi Economic Surprise Index shot up to -36.8 by the end of last week, off the yearly low of -57.3 set on October 14.
Futures positioning remains stretched as well, which would be the fuel for the covering rally. Non-commercials/specs held 159.4K net-short contracts for the week ended October 21, an increase from the 155.3K net-short contracts held a week earlier.