FX traders must consider the source of risk aversion
Sept 4 (Reuters) -FX traders should keep in mind the source of current risk aversion, which mainly stems from a will to reduce exposure ahead of a big event and not bad news.
The basis of moves unfolding recently is profit taking and while the resulting drops for equity markets are certainly risk averse behaviour, investors banking cash now will have more money to invest in the future.
If there is a good type of risk aversion, then this is it, and those banking profits today will likely return to the same investments in the future, especially if the period of adjustment lowers their value.
This is certainly the case right now and investors can be sure of some stimulus to fuel risk appetite in the near future if the U.S. central bank starts to lower interest rates.
For FX traders who have sold the dollars they once treasured, an easing cycle is set to stimulate an economy that is in a fairly robust state and support inflation that is still above the Federal Reserve's target. Interest rates may not fall far, and should stimulus fuel already elevated inflation, it may not be too long before the U.S. interest rate and dollar rise again.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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