RORO IS ONE OF THE GREAT HEADACHES OF THE CURRENCY trader’s existence. Short for “risk on/risk off,” RORO has been the most powerful influence on foreign exchange in the past few years. The idea: When market participants are confident in the economic outlook, they take on risk by piling into currencies like the Indonesian rupiah and the Brazilian real. When confidence ebbs or a crisis hits, they rush to shed risk, seeking safe havens like the U.S. dollar. “It’s almost as if the market is being bipolar,” says Mark McDonald, a London-based quantitative foreign exchange strategist at HSBC Holdings. “It’s extremely hard to consider currencies without taking this force into account.” In the old days, McDonald explains, traders would try to come up with models for valuing currencies based on interest rate differentials and other macro factors. But now when risk is off, investors....

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