The recent trend towards risk aversion has become so pervasive

With the US non-farm payrolls (NFP) report scheduled for release; many traders believed Friday’s session could turn out to be another extremely volatile day for the dollar. While in fact the session would prove to be highly active, the impetus for the bustle wasn’t the event risk but rather the momentum behind underlying sentiment trends. Essentially, the recent trend towards risk aversion has become so pervasive that it has been able to overpower event risk that does not conform to the direct interest in unwinding high-yield positions. In the final three days of this past week, the benchmarks for the various asset classes have forged meaningful progress towards establishing a lasting bear trend that draws capital out of over-bought securities and redirects it to safe havens. This is particularly supportive of the greenback as the reversed flow of speculative funds means carry trades financed with dollar loans will encourage repatriation; and global investors will further look to the dollar for its liquidity and the backing of US Treasuries. Considering many risk-related assets (especially equities) are still in the early stages of their corrections, there is a good source of momentum. At the same time, the dollar has already retraced over 50 percent of the losses it accumulated against the euro through 2009. Does this mean the greenback’s rally can persist for as long as these other markets retrace? Unlikely. Eventually, the carry flows will be tapped and the correlation will start to break down. Yet, such a shift could still be a long way off.In the meantime, it is worthwhile to reflect on the dollar’s reaction (or lack thereof) to the January labor data. The response to the December payrolls was substantial as risk appetite was sparked not by that month’s reading but the positive revision to the November figure to 4,000 jobs added. Psychologically, this positive reading was the ‘light at the end of the tunnel’ after two years of net losses. However, this milestone has been met and now the real fundamental considerations begin. With this Friday’s report, the 20,000 net loss was unexpected and the previous loss was nearly doubled to a 150,000 drop. On the other hand, the unemployment rate would fall from 10 percent to 9.7 percent – the biggest drop since 1998. For volatility traders, this data had little direction. To fundamentals traders, the improvement in the rate in the face of job losses was a sign of discouraged American’s dropping out of the labor pool. This is not a positive turn as those leaving the pool are still without jobs (not contributing to growth) and they will likely return when conditions improve. Nonetheless, this would inevitably end up a non-event. With over 8.5 million jobs lost since the beginning of 2008, it will take a considerable pace of large payroll increases to reduce the jobless rate while still handling new entrants to the labor force. Looking ahead to next week, the docket is exceedingly light. The bounce in risk trends and pull back in the dollar through the end of Friday suggests the bear trend won’t be overbearing for Monday’s open. On the other hand, without many fundamental hurdles to worry about; currency traders may be more confident in setting positions that look for developing trends.