Top FX trading ideas all take you to the same place
UUP•FX themes are converging on the same trade
FX trades have become increasingly correlated this year, regardless of the underlying trading theme, and BMO are out with a note on Monday warning about the risk of drawdowns.
The best performing FX trading theme for the year has been carry, and that means being long LatAm and CEMA, and probably short dollars.
But BMO point out the other top themes of the year — buying risk on currencies, trading momentum and trading positioning — also take you to be short the dollar and long LatAm and CEMA currencies, and so all four are "increasingly expressing the same underlying theme."
"In other words, carry, momentum, positioning, and risk have become highly correlated, and now largely represent a single expression of one market view."
"That concentration is exactly what screens to us as the major dislocation, and why we are increasingly wary of drawdown risk in these popular strategies," they write.
The themes they find that haven't worked for FX trades have been focusing on terms of trade, growth, inflation, and moves in equities.
