Buying the Risk Rally? Think Again!

Over the past two weeks, we have seen the Greenback slide sharply against its major counterparts. Among the more notable losses for the dollar include EUR/USD‘s 5.5% rise from its lows, its 9.4% fall against the Brazilian real, and a ginormous 10.1% decline against the Australian dollar. The dollar hasn’t been alone though, as safe haven favorites like the yen and the franc have pared back their gains against their high-yielding counterparts as well.

And who could blame the currency bulls for attacking? Lately, euro zone officials have been busy burning the news wires with comments on finding a solution to the region’s debt problems. In fact, they even gave themselves a one-week deadline on the issue after the G20 meeting last weekend.

Of course, it also didn’t hurt that the U.S. has been popping out better-than-expected economic figures like the most recent NFP report and retail sales data. Though the positive reports signaled that the Fed will most likely postpone more QE (which would weaken the dollar), they also suggested that the world’s largest economy is in less trouble than investors originally thought.

Time to short?

Unfortunately, the good vibes might not last for long. For one thing, much of the high-yielding currencies’ rally hinges on the optimistic comments of the euro zone officials. Any significant shift in the officials’ tones could drag the euro and the other high-yielding currencies sharply lower.

This is precisely what we saw yesterday, when German officials Angela Merkel and Wolfgang Schäuble inspired risk aversion just by implying that a solution to the debt problem might be reached later than markets estimated.

Another dark cloud threatening to rain on the bulls’ parade is the impending deadline for the U.S. Congressional Super Committee, a 12-member Congressional group evenly split between the Democrats and the Republicans, to submit its recommendations on finding $1.5 trillion worth of budget savings.

The group has been meeting on a regular basis since early September, but rumor has it that it hasn’t made much progress until now. If you will recall, a similar deadlock on the debt ceiling debate during the summer led to a downgrade of the U.S. credit rating and a huge round of risk aversion in markets. Are we about to experience a déjà vu on November 23 when the recommendations are due?

The last and probably the biggest reason why not all traders are excited to buy risky assets is that fundamentally, nothing much has changed in the major economies’ outlook. Though traders initially shrugged off the news, they didn’t completely forget that the IMF sharply downgraded its economic forecasts for the U.S. and the euro zone; Italy, Spain, and now even France’s credit ratings are in hot water, and that investors are still talking about a Greek haircut.

Many say that being a trader is not about predicting price action – it’s about trading it. While it’s not a bad idea to consider maximizing your profits by doubling up on your long positions on the high-yielding currencies, it doesn’t hurt to consider all possibilities especially amidst the recent volatility in markets.

  • gerald

    Make money buying and selling instead of waiting for the big one to sell. When exactly is the right time to sell?? The euro woes have been around for almost 3 years now and we keep hearing about how unwise is it to buy into euro now or how this rally is short term/temporary (Well, this rally have advanced 700-800pips already!!) SO if you have waited to sell, you have waited for almost 2 weeks without trade!