BORIS SCHLOSSBERG<br /><strong>DIRECTOR OF CURRENCY RESEARCH, GFT<br /></strong>WHICH investment thesis will be proven right – the recovery trade or the return of risk aversion? For the past few months, the recovery trade has dominated, with risk currencies gaining on the US dollar. Recently, however, that rally has stalled and the bears have re-emerged, arguing that the recovery will give way to another round of contraction as the initial impact of easy monetary policy and fiscal stimulus begins to wear off.<br /><br />While the bulls and the bears slug it out, there is a third possibility that only a few players have considered. What if nothing happens? As we enter the summer doldrums season and traders’ minds drift from their flashing screens to St Tropez, a low-volatility, range-bound market could become a reality. Geopolitics could always interfere but assuming stability, currencies could stay in a range until September.<br /><br />As the recovery rally fizzles out and markets go into their summer stall, investors may begin to focus on yield rather than capital appreciation. If consolidation continues, then the Australian dollar could remain well bid as investors flock to the currency’s 3 per cent short-term interest rate. With rates in the rest of the G4 hovering between 10 basis points and 1 per cent, and likely to stay that way until 2010, the Aussie and the less-liquid New Zealand dollar represent the only meaningful yield among the major currencies.<br /><br />However, the long Aussie trade has some risk; Australia is effectively a proxy bet on continued Chinese expansion. If China’s economy starts to falter, currency traders will become concerned about Australian growth. Already, some believe the risk of another Australian rate cut is greater than a hike. Nevertheless, if markets continue to tread water for the next few months, the Aussie could outperform the euro and the pound.<br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read daily commentary at www.GFTUK.com/commentary or e-mail BorisandKathy@gftuk.com.