Trading Nation

Why this popular trade could cause ‘some pain’

Euro short squeeze

As the euro falls against the dollar, investors that have piled into short bets against the euro could soon be in for trouble, according to one trader.

"Almost everyone on Wall Street hates the euro right now and everybody is convinced that it's going to parity," Boris Schlossberg of BK Asset Management said Tuesday on CNBC's "Trading Nation." "And it very well may. But not before I think it hurts quite a lot of complacent shorts."

The euro has fallen almost 10 percent for the year, recently landing at about 1.09 against the dollar. Schlossberg said he believes the euro will likely rise to 1.11 before drawing closer to the dollar value, which could deal a blow to some short positions.

"Everybody is sort of piling into the short side. If we go five pennies against them, they're going to feel some pain," Schlossberg said.

Schlossberg said there are several reasons why the euro won't be falling as fast as some think. First, a resolution with Greece's debt deal has calmed concerns for the region and global markets.

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Schlossberg also said low oil prices and easy credit from the European Central bank will continue to stimulate the economy.

Lastly, there's a possibility the Federal Reserve will wait until December to raise interest rates, in which case "the euro simply rallies on dollar disappointment," he said.

Ari Wald of Oppenheimer said although the euro is oversold right now, he sees further drops ahead in the longer term.

In a chart, Wald points out the time between 2000 and 2002, when the euro held at a consistent low before rising again.

"After a prolonged period of euro weakness, that base in the euro took about two years to develop before the euro started to move higher again. We don't have anything like that in play," he said.

But Wald said a short-term rally for the euro could play out, and "if you do get that pop, we think based on long-term trends you're going to want to sell it."

Schlossberg ultimately agrees.

"I'd be selling later, but not now," the trader said.

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