DJ Forex Focus
Second-guessing The Brains In The Market. By Katie Martin
How much of the smart money is left in this risk rally?
That's the question bothering analysts right now, as it could be central to figuring out how robust recent moves are.
Those who were clever enough or lucky enough to pounce early on the rally in risky currencies, and the flip-side tumble in the dollar, have no doubt scooped up handsome gains in the past couple of weeks.
But what's to keep them in it now? It's hardly as if the end of this week is free from obvious risks.
The European Central Bank holds its monthly press conference later Thursday, and a note of caution over the euro's current strength is a conceivable prospect.
After all, Canada's finance minister hinted this week that measures to drag the so-called loonie back down could be on the cards. There's some debate about whether he truly intended verbally to intervene in the markets, but still, many observers have interpreted the comments as the first among what may prove to be many interventions among major economies to support the wobbly U.S. dollar. ECB President Jean-Claude Trichet is unlikely to take a similar step later Thursday, but never say never.
Also later today, the Bank of England announces the results of its policy meeting. Interest rates are almost certainly going to stick at 0.5%. But after the sparkling run of positive U.K. data Wednesday, it would be unwise to rule out a pause in quantitative easing measures.
Economists are evenly split in their views here, with roughly half expecting the Bank of England to spend its remaining GBP25 billion allocation and others expecting quantitative easing to stay on hold. With such a fine balance, a reaction in the markets either way is likely.
Then, of course, Friday brings the key U.S. nonfarm payrolls labor market report. It could be surprisingly positive, reasserting the bullish run in risky assets and squashing the buck. But that's a tough call.
All in all, there's just no reason for the lucky few who have really profited from recent moves to stick with their bets for now. If the dollar starts tumbling again, they can get back in later. For now, they are clearly holding fire, as lacklustre, directionless major currencies have demonstrated since Wednesday.
Indeed, it could well be that the early birds have already largely bailed out and shoved the profits under a mattress. It's the late comers who may be artificially extending the moves now.
Analysts at Barclays Capital pointed out Wednesday that, judging by their published returns, hedge funds and other speculators piled into the pro-risk theme late last week.
"This suggests that there may have been an element of position building to some of the late-week rally, and that some of the gains in risky assets were themselves driven by this flow, rather than by new information on economic and asset market buying," the bank said.
If, as seems likely, this new flow is not enough to form decisive breaks of key levels, like $1.44 for the euro, of $1.70 for the pound, it would take little for these punters to bail out too.
"We have to be really careful to identify what's driving this market and not get carried away," said Simon Derrick, a senior currencies analyst at The Bank of New York Mellon in London.
"We should be worried about this risk rally. I have a funny feeling about this," he added.
In early European trading Thursday, key currencies were showing few signs of activity. At 0615 GMT, the euro was holding steady at $1.4410, from $1.4415 late in New York Wednesday, according to EBS. It was also steady at Y137.16 from Y136.95.
The dollar was still wedged into its recent range at Y95.19 from Y94.96. The pound was flat at $1.7006. The dollar was at CHF1.0622 from CHF1.0609.
That's the question bothering analysts right now, as it could be central to figuring out how robust recent moves are.
Those who were clever enough or lucky enough to pounce early on the rally in risky currencies, and the flip-side tumble in the dollar, have no doubt scooped up handsome gains in the past couple of weeks.
But what's to keep them in it now? It's hardly as if the end of this week is free from obvious risks.
The European Central Bank holds its monthly press conference later Thursday, and a note of caution over the euro's current strength is a conceivable prospect.
After all, Canada's finance minister hinted this week that measures to drag the so-called loonie back down could be on the cards. There's some debate about whether he truly intended verbally to intervene in the markets, but still, many observers have interpreted the comments as the first among what may prove to be many interventions among major economies to support the wobbly U.S. dollar. ECB President Jean-Claude Trichet is unlikely to take a similar step later Thursday, but never say never.
Also later today, the Bank of England announces the results of its policy meeting. Interest rates are almost certainly going to stick at 0.5%. But after the sparkling run of positive U.K. data Wednesday, it would be unwise to rule out a pause in quantitative easing measures.
Economists are evenly split in their views here, with roughly half expecting the Bank of England to spend its remaining GBP25 billion allocation and others expecting quantitative easing to stay on hold. With such a fine balance, a reaction in the markets either way is likely.
Then, of course, Friday brings the key U.S. nonfarm payrolls labor market report. It could be surprisingly positive, reasserting the bullish run in risky assets and squashing the buck. But that's a tough call.
All in all, there's just no reason for the lucky few who have really profited from recent moves to stick with their bets for now. If the dollar starts tumbling again, they can get back in later. For now, they are clearly holding fire, as lacklustre, directionless major currencies have demonstrated since Wednesday.
Indeed, it could well be that the early birds have already largely bailed out and shoved the profits under a mattress. It's the late comers who may be artificially extending the moves now.
Analysts at Barclays Capital pointed out Wednesday that, judging by their published returns, hedge funds and other speculators piled into the pro-risk theme late last week.
"This suggests that there may have been an element of position building to some of the late-week rally, and that some of the gains in risky assets were themselves driven by this flow, rather than by new information on economic and asset market buying," the bank said.
If, as seems likely, this new flow is not enough to form decisive breaks of key levels, like $1.44 for the euro, of $1.70 for the pound, it would take little for these punters to bail out too.
"We have to be really careful to identify what's driving this market and not get carried away," said Simon Derrick, a senior currencies analyst at The Bank of New York Mellon in London.
"We should be worried about this risk rally. I have a funny feeling about this," he added.
In early European trading Thursday, key currencies were showing few signs of activity. At 0615 GMT, the euro was holding steady at $1.4410, from $1.4415 late in New York Wednesday, according to EBS. It was also steady at Y137.16 from Y136.95.
The dollar was still wedged into its recent range at Y95.19 from Y94.96. The pound was flat at $1.7006. The dollar was at CHF1.0622 from CHF1.0609.
6 August | 
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