EUR/USD saw a quick flurry to the topside as US equity performance improved (Warren Buffett is buying the Burlington Northern railroad) and GBP/USD and AUD/USD have seen solid buying on weakness today but well-placed traders say they are seeing little follow-trough despite the flows.
An interesting piece of analysis made the rounds this morning that hedge fund returns and the weakness of the dollar have been almost perfectly correlated in recent months. This strongly suggests that the risk.reflation/carry trade is universally owned by the leverage community and that an unwind could get quite chaotic. It only takes one leg of the three-legged dollar/equities/commodities stool to break to send the trade off a cliff.
We appear to be at just such an inflection point. The recent run up in options volatility is very likely an attempt by funds to protect profits. Clearly the market is nervous.
We could be at the threshold of something very ugly for markets and supportive of the dollar, indeed.
EUR/USD is edging toward 1.4650 where Asian central bank bids are rumored.
