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Risky Trades Getting Even Riskier: Strategist

Bull or Bear Market
Andrew Unangst | Photographer's Choice | Getty
Bull or Bear Market

Trying to ride a risk rally in currencies? Better hold on tight.

Sorry, Tom Cruise, but there's a new kind of risky business in town.

Risky assets have been relatively resilient lately, but the strategists at Barclays Capital say that pattern could soon become more choppy—and more likely unpleasant for less hardy investors.

"Risky currencies have been holding up against the USD and the EUR recently," they wrote in a note to clients. But "we think the tactical rally in risky currencies may be behind us and now look for hints of more QE in the US, a gradual improvement in Chinese data, or repercussions from Spanish Prime Minister Rajoy's economic plan for Spain to evaluate whether the risky currency rally has legs."

In other words, investors will now be looking for actual facts to support their risk appetite. And the BarCap strategists aren't so sure such data will emerge.

True, the strategists are impressed by Spain's efforts at reform, and argue that the changes "could become a game changer for investor confidence."

But there are other factors pulling in the opposite direction.

With Federal Reserve Chairman Ben Bernanke due to opine again on the economy, "we think the Fed will look to avoid QE3 if employment data rebound, as we expect," the strategists wrote. Also, "US Q2 earnings season continues this week and our Equity research team forecasts negative earnings surprises overall, potentially weighing on risk sentiment."

They also argue that the bias among emerging-market central banks remains tilted toward easing, which would hurt those riskier currencies.

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