Strategists: Currencies' Risk Rally Won't Last

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Risk-sensitive currencies have been on a roll, but these strategists say the fun is about to end.

If you've been riding risk-sensitive currencies, you're probably feeling pretty smart. The Norwegian krone, Canadian dollar, and Mexican peso have seen significant gains as events like the Fed's QE3 announcement and the European Central Bank's plan to launch new bond buying have kept investors in a buoyant mood.

Sadly, the party is just about over, say Nick Bennenbroek and Vassili Serebriakov, currency strategists at Wells Fargo. Investor positioning, a lack of good news on the horizon, and the prospect of a sudden end to big U.S. tax breaks are beginning to weigh on risk appetite, they say.

In terms of positioning, investors are building short positions in the dollar, suggesting that they may have to cover quickly - and add to upward momentum - if the greenback strengthens. On the flip side, "speculative long positioning is particularly extended for some of the commodity and emerging currencies – for example, the Canadian dollar and Mexican peso," the strategists wrote in a note to clients.

Also, while the ECB's bond-buying program and various central banks' stimulus moves have boosted risk appetite, most of that good news is now in the past. What lies ahead is considerably less promising: the chance that the United States may suddenly see $600 billion in tax cuts expire in the "fiscal cliff," and the prospect of more weakness in the euro zone.All in all, the strategists say, it's not a pretty picture for risk-sensitive currencies.

"Considering the market’s recent run, extended positioning and the upcoming event calendar, we suspect the ingredients are in place for a period of 2 percent to 4 percent corrective weakness in the euro and other foreign currencies into and around the turn of the year."

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