Risk-on has been investors' favored approach to currencies for several weeks now. But one top strategist says the time for risky business is ending.
Steven Englander, global head of G10 FX strategy for Citigroup, is feeling a little crowded - or at least his trades are.
"There's a certain point at which good news is fully digested," he told me. "You infer that a lot of the digestion is done when you begin to see that everybody's positions seem to be highly correlated with each other. We were happy to have great returns last week, but guess what? Everyone else did too, and if there's one scary signal in the market, it's that."
Riskier currencies are on the outs today, what with Japan upgrading the severity of its nuclear disaster, discussions underway on a bailout for Portugal, and investors simply realizing that some currencies, like the Australian dollar, have come very far very fast. But Citi started reducing risk-on positions a couple of weeks ago, Englander said.
In the past two weeks, Citi been cutting its long Canadian dollar and Norwegian krone positions, and reducing its short positions on the U.S. dollar and the Swiss franc.
It's a relatively subtle call.
Englander has not suddenly turned bearish on fundamental factors. It's more that the positions Citi has been holding have just gotten too popular, and any change in sentiment would hurt.
How popular? More than you might think.
"We also find indications that the long high beta FX trade has become an important macro trade rather than simply an important FX trade. When positions spread beyond the FX community, vulnerability can be even greater," Englander said in a note to investors.
Should you bail on riskier currencies right away? No - but the yellow lights are sure flashing.
MULTI CURRENCIES v The Dollar
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