Is There a Euro Short Squeeze?

The euro started the year with an aggressive move on Tuesday, rallying over 0.70% against the US dollar. Against the British pound, the euro gained just over 0.20%. European stocks also saw a strong session on Tuesday. The German DAX rallied about 1% at its highest point. Last week, data released by the Commodity Futures Trading Commission indicated that short bets against the euro had risen to record levels while long US dollar positions had also seen increases. Given the open activity in

, the action witnessed early on Tuesday may have been a byproduct of an aggressive short squeeze. Fundamentally, there appeared to be no positive news on Tuesday, and Asian markets had remained closed over night. Other possibilities for Tuesday's rally were the possibilities of relief and the so-called "January Effect." With European stocks trading near record lows on an earnings basis, these stocks may have seen some relief as bargain hunters entered the market. At the same time, the January Effect is widely known by traders and could have contributed to the positive move on Tuesday. The effect states that, on a historical basis, stocks tend to rally in January. Further, large investors and traders may have reentered the market on Tuesday. Many traders exit the market towards the end of December, as the holidays zap trading enthusiasm. If these players reentered on the long side, it would explain Tuesday's move. If Tuesday's gain is a byproduct of a euro short squeeze, traders may anticipate it to be short-lived. Eurozone leaders have as of yet failed to produce any definitive plans for a resolution to the crisis, and the next major summit is weeks away. Early on Tuesday, it was reported that the

was seen by traders actively participating in the European debt markets, purchasing the bonds of Italy and Spain. Although the ECB has denied that it would monetize European debt, the central bank has been active to some extent in the markets, purchasing the debt of these countries on occasion—perhaps in an effort to keep the yields on these bonds from spiking too significantly. Currently, the EUR/USD is trading just above the important $1.30 level. While the currency has remained in a general downward trajectory, a short squeeze that lasts for multiple sessions could see it bouncing significantly.