While the risk aversion trade no longer has a stranglehold on forex trading, the market remains somewhat aloof to fundamental and technical pressures that normally hold sway. And, although the new trading pattern is not yet fully set nor predictable, some guidelines have emerged in the previous two weeks.

When fear returns to dominate markets, the risk aversion rules apply. Safe haven flows into the Japanese yen, U.S. dollar, and Swiss franc are tied to bond sales and inversely correlated to global equities bourses. Simply put, if stock indices fall, demand for safe capital havens such as bonds and the three above-named currencies will rise.

However, when fear diminishes, as demonstrated in the past two weeks, the underlying dynamics reflect shifting forex tectonic plates. Currency pairs have again shown some tendency to seek, if not an actual equitable balance related to the economies of the nations in question, then at least an optimistic move toward capital seeking potentially higher yields. This has led to the dichotomous scenario in which, even as U.S. economic data collapsed in the fourth quarter of 2008 and very early in 2009, the dollar rose; now, when (to quote Federal Reserve Chairman Ben Bernanke) the pace of the U.S. economy’s collapse “may be slowing,” with occasional data prints surprising to the upside, the dollar is falling.

Should U.S. economic fundamentals (and U.S. bank earnings reports) continue to surprise to the upside, the potential is for a strengthening of higher-yielding currencies, particularly the commodity dollars of Canada, Australia, and New Zealand. Forex traders are reminded that the Eurozone is lagging behind the U.S. and U.K. on monetary policy maneuvering, leaving downside potential for the economy and the currency, while much bad news has already been priced into the pound sterling, leading to its recent resiliency against most crosses including USD.

AUD/JPY remains the most immediate and consistent indicator of risk aversion among currency pairs. Forex traders can do worse than watch its price action on an absolute level as a market barometer of fear and greed.

For the remainder of this forex trading week, the risk events are as follows:

In bank earnings announcements, JP Morgan Chase & Co. is expected to be solidly profitable on Thursday, with earnings forecasts ranging from US$0.16 to 0.35 per share.
Citigroup Inc., which reports on Friday, is expected to break the U.S. banks’ winning streak with a loss of around US$0.30 to 0.55 per share.

Wednesday:
•    U.S. March CPI is expected to turn slightly negative on a y/y basis.
•    U.S. February net long-term TIC flows are expected to be positive.
•    U.S. April Empire manufacturing is expected to fall to −35.00 from −38.23 previous.

Thursday:
•    Canada February manufacturing shipments are expected to rebound to as high as 2.0% from −5.4% previous.
•    Eurozone March CPI is expected to fall to 1.4% y/y.
•    Japan February tertiary industry index is expected to fall −0.8% m/m.
•    U.S. April Philly Fed survey is expected to fall to −32.00.

Friday
•    Switzerland February retail sales are expected to fall slightly on a y/y basis.
•    Australia 1Q2009 import and export prices are both expected to decline; however, exports are expected to print at −5.0% and imports at −2.2%.