The relationship between the USD and good or bad US data tends to shift and change depending on the global backdrop; in simpler times before the financial crisis one only had to keep their finger on the trigger and expect that strong numbers implied stronger currency. For much of 2009, that relationship was flipped on its head; with good US data fuelling risk appetite trades and consequently a flight out of the USD safe-haven. But where do we stand now? The answer does not appear all that obvious based on recent evidence; the hesitant reaction after yesterday's extremely underwhelming US figures suggests to us the market has still not reached a consensus either. Expectations for an upwardly revised Q1 GDP reading of 3.4 % QoQ annualized (from the original 3.2% print) were rapidly quashed by the downward revision to 3.0%, whilst core PCE was in line with the benign 0.6% QoQ expectations, and this week's jobs data were not as improved as hoped. The reaction of the USD? Well, pick your currency pair. EURUSD seemed completely disinterested in the release, GBPUSD rallied (USD weakness), USDCHF rallied (USD strength), USDJPY spiked lower temporarily before ramping higher... For some, the erratic behaviour of late is symptomatic of an acute level of headline risk that is making speculative trading more treacherous than even volatility-loving currency traders are willing to play with - and a lack of participation is leading to thin flow-driven markets. However we are beginning to align ourselves with the view that prevailing choppiness is due to the clash between positioning headwinds and medium term fundamentals. Let us elaborate; as things stand, EURUSD short positioning has been near record levels for a protracted period of time, and indeed the long-standing trends across a number of currency pairs (predominantly characterized by USD and CHF strength) seem long overdue a correction. Add into this mix the theory that a number of commentators have suggested that the USD is in a win-win situation right now from a fundamental perspective. It finds itself in the sweet-spot of relative strength versus its major counterparts in Europe who are dogged with debt crises - meaning good US data points to the Fed hiking first and thereby fuelling USD-strength; whilst on the flipside, with the status of the EUR undermined as a serious reserve currency contender, bad data should also favour the USD as a safe-haven. For sure, the recent price action has been uncomfortable, but with these arguments on the table we will certainly be looking to pick our currency pairs wisely and look for the best value levels to start adding to USD longs.

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