Daily forex News 8-11-2009

Friday’s market reaction to the surprise non-farm payrolls July figures might signal a crucial shift for currencies and markets in general. US non-farm payrolls for July were better than expected, falling by -247k, while the unemployment rate dipped to 9.4% from 9.5%. After initial claims and a major US bank reset their forecast at -250k, participants were unsure where consensus lay and provided with high drama (volatility) on the release. But when the smoke cleared, it was the USD that continued to rally on the stronger US data. The recognized correlation between EURUSD and US 10yr yields appears to have decoupled and traders are now focusing on to the 2yr interest rate differential between Eurozone and US. This is a shift that suggests that positive economic data will now support the domestic currency. The USD benefiting from positive US recovery data is a theme not seen in a while (negative correlations between USD and risk entrenched itself post Lehman). What seems to have changed on Friday was that markets are looking at the growth differential story over just the risk appetite (risk aversion positive for USD) trade, which is important since most analysts agree that the US will be one of the first developed countries to recovery, which could have positive consequences for the USD. This shift also suggests that the US recovery is well on its way and that the Fed will begin (and has the economic cushion) to adjust rates higher due in time. The accompanying statement following the FOMC Wednesday meeting will be important, since it should provide direction. Overall, we expect a pinch of more optimism, no expansion of treasury purchase program and maintain their intention to keep rates unchanged at an "exceptionally low and for an extended period". There are a few reasons why this fragile trend might break down (we have seen it do so in the recent past) such as capital flows and oil prices, so this week’s economic indicators like US industrial production and Retail sales will put the theory to the test. As the market struggles with the EURUSD / US 10yr dilemma, we still expect stronger than consensus data around the world to have positive impact on select risky currencies such as AUD, CAD, NZD and Ems currencies