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Why Euro Shorts Are Getting Squeezed

The euro is grinding higher and investors who are short the currency are feeling the pain.

Sometimes when expectations are less than great, it's a trap for investors. Talk in recent weeks that the euro might eventually fall to parity against the dollar appears to have convinced some investors to sell the common currency short.

But now Spanish and Italian bond yields are falling, suggesting that the crisis conditions are easing for the moment, and investors are recovering from their disappointment at European Central Bank President Mario Draghi's comments last Thursday.

Add in a little bit of risk appetite, and some hope for ECB bond buying, and investors who have been short the euro are getting squeezed.

Art Cashin of UBS told CNBC that one reason the talk of parity "got a lot of people who shouldn't be in currencies short the euro, and they're paying the price now" in what he describes as a "massive short squeeze in the euro."

And Camilla Sutton, chief currency strategist at Scotia Capital, last Friday pointed out in a note to clients that for the euro, "narrowing in the net short position was driven by a considerable amount of short covering in contrast to the previous week’s increase in gross longs."

Be careful out there.

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