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Trading Easy-Money Currencies Just Got Harder

London Bridge
Photo: Chris Hepburn | Getty Images
London Bridge

Risk appetites are getting sated, and this strategist is wary of currencies from countries with stimulus programs underway.

Well, it was fun while it lasted. Stimulus moves by the Federal Reserve, the European Central Bank and the Bank of Japan boosted risk appetite in the currency markets for days - but new data show that the fun is fading.

The CFTC's latest report on traders' positions shows that "traders are increasingly hesitant to be long the currencies associated with central banks who are undertaking asset purchases," say the strategists at Scotiabank.

The mood shift has interesting implications, they say. For starters, investors are putting pressure on currencies where central bankers are hawkish or neutral, like the Canadian dollar, the Australian dollar, and the New Zealand dollar.

Currencies where central banks are injecting relatively little stimulus are looking better than the true easy-money plays as well, the strategists say. Exhibit A is the British pound.

The pound hit a 13-month high last week, which creates some downside risk. But at the same time, traders' "relatively muted" net long position removes some pressure, the strategists say. In addition, the Bank of England "remains concerned about risks to stability, and continues to recommend that banks build capital buffers in the near to medium term."

All this means the pound should outperform some easy-money counterparts, notably the euro, the strategists say. Technical indicators for the pair are troubling, they say, and "this combined with the impact of GBP positive flows, should see EURGBP weaken."

For short term traders, the strategists recommend selling the euro against the pound right around current levels, at 0.7965, with a stop at 0.8030 and a target of 0.7800.

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