Beware the Ides of December

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Apologies for the Grinch-like tone of this post, but it's news you need to know.

Just when you thought you could step away from your screen over the holidays, new data suggests there could be big swings ahead in the forex market.

"FX positions are at extremes, with almost every net long held in the largest amount it has been all year and the net short JPY position also extended," said Camilla Sutton, chief currency strategist at Scotiabank. "This leaves FX markets vulnerable if there is a sudden shift in sentiment or spike in risk aversion." In other words, with so many investors positioned in the same directions, a big news event or other market mover — think 'fiscal cliff' - could cause many of them to reverse course quickly.

Want specifics? Sutton pointed out in a note to clients that gross long positions on the Canadian dollar, while below the highs reached in September, have still risen for the second straight week.

Net short positions in the euro have been reduced, she said, calling it "a healthy development." Short yen positions are also smaller — but they remain very large, at $13.2 billion. Also, Sutton said, "the continued build in gross shorts suggests an unrelenting desire to position for weakness into year end." That ought to work well if incoming Prime Minister Shinzo Abe continues to call for stimulus moves — but any bullish event could have dramatic consequences.

It would be one thing if the end of the year were promising to be sleepy. But Sutton has rattled off for me several things that could keep currencies hopping:

"Central banks, any hint that the Fed is shifting away from QE," she said. "Europe, if there is no progress on the banking union or politicians look unwilling to negotiate for President Draghi's four pillars (economic, political, monetary and fiscal unions.) Geopolitical risk, any spike in geopolitics that drives volatility higher would see positioning unwound." And of course, Congress has brought us the 'fiscal cliff' impasse.

Good luck out there.

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