[cppene]

Anecdotal evidence suggests the way USD is responding to news flow is changing. Last Friday’s payrolls release was a case in point - an upside surprise on employment was associated with a stronger rather than weaker USD for the second time in three months. The market reaction to payrolls surprises has been largely the other way since the failure of Lehman last autumn. Good news - even good US news - has generally been bad news for USD. Although most visible for recent payrolls releases, this regime shift in USD’s response to news flow - both good and bad - also holds across a broad range of indicators and hints that near-term USD risk may be more balanced than heavy short market positioning suggests.

USD tends to rally when US data are surprising to the upside, rather than falling as it has done consistently since the onset of the financial crisis that caused markets to trade on little more than risk aversion in October of last year. This is further evidence of the “normalisation” of FX markets that seems to be underway and that traders expect to continue as the evidence mounts that the global economy is past its cyclical trough.

Of course, there is no guarantee that US data will continue to surprise to the upside in the way they have in recent weeks, nor that the change in the way markets react to US news will be sustained. But with both risk reversals and IMM positioning skewed heavily in favour further EUR/USD gains, the risk of a sharp pull back is greatly magnified by rising number of potential catalysts – now including upside US activity surprise.