Currencies are trading in risk averse fashion at month-end though the related markets are not showing a great deal of distress today. As noted yesterday, there seems to be more of a macro shift taking place these days rather than short-term headline chasing.

The macro view that the dollar was destined to reached Zimbabwe-like depths and that commodities would reach levels several times higher than today’s prices seems to have been dashed. Central banks continue to let lapse liquidity programs that programs that are no longer needed and fixed income markets have adjusted accordingly, With US yields 40-50 basis points higher than they were just two-months ago.

The dollar will not strengthen in a straight line, but the melt-down risk (hope?) that was priced in by the market is now priced out and technicals are such that long-dollar positions are preferred. If this results in less reserve adjustment, even at the margin, the dollar will benefit as Asian, Latin American and Middle Eastern central banks will be less inclined to blindly buy EUR to diversify reserves.

Today’s improved US data is just icing on a much bigger global asset shift, in my opinion. Forex trends can be very long-lived and powerful. Fading dollar strength is not recommended.

Day after day we write about risk aversion as Chinese tightening steps pop up or Greek debts implodes…What we haven’t done is take a step back and look at the bigger picture.

The dramatic currency moves over the last two months seem to be the result of a larger macro shift that is underway. For the middle months of 2009, the market was more than happy to borrow and sell dollars against anything with a yield or with a chance of price appreciation. The US was perceived to be circling the drain and hyper-inflation was just around the bend.

In the last two months, we’ve seen a shift in market behavior. Traders are no longer willing to buy gold at any price. They are no longer willing to borrow dollars to buy the currency of any country where China might one day source a natural resource. In short, we’ve become more risk averse, but not as a result of the headlines of the day (which punctuate that risk aversion) but for fears that a dollar bubble has been created.

China’s Zhu Min put a price tag on the carry trade yesterday in Davos: $1.5 trln. It would appear we’ve spent the last few months covering some of that $1.5 trln short and likely have a ways to go before we are done.

With reports of Asian central banks now selling EUR/USD on rallies at lower and lower levels, expect consolidation in the single currency in the near-term, not a swift reversal to the topside.

The surprisingly firm pound of recent weeks is another sign that the heavily shorted currencies of 2009 will be the out-performers of early 2010.

I’m still trying to connect the dots from this week, but they don’t much connect.

Gold took off for the stratosphere. China, right? I guess.

Bonds yields fell toward range lows even though another $70 bln in supply was issued. As gold soared.I still don’t get it.

“We’re worried about your currency, but hey, how about another helping of those long-bonds over there…”

Still does not make much sense. Oil falls $3.50 on a day gold makes a new trend high?A weekly close below $70.

I could go on and on.Most of the correlations on which we’ve relied in recent months are badly breaking down and traders are trying to come up with new relationships on which to lean. USD/JPY is no longer a risk barometer though it looks as though EUR/USD is plying that ground.

Maybe enlightenment will come with a weekend’s reflection…Hopefully the markets make more sense to all of you than it does to me at the moment.

For those who have not already seen this one, Goldman and Morgan Stanley analysts have hiked their forecasts for 2009 Chinese growth. Goldies revised their expectations from 6% to 8.3% and Morgans raised theirs from 5.5% to 7.0%.

The head of the BOJ said that the US economy needs to work out excesses including household over-indebtedness. For more on his comments please click here.

The Nikkei is down over 0.5% in early trading with automakers and one or two financials to blame. Things in Australia have slipped slightly into the red after a positive start to the day. South Korea’s Kospi is currently in positive territory with better than expected GDP numbers this morning.

Please click here for the updated economic data table for today. I have included the GMT times as well as the data released in Japan this morning. Nothing else to pay attention to for a few hours yet.

Have a look at the table to familiarise yourself with what is out in Europe and the US on Friday.

The All Industries Activity number has come in at -2.0%, smack bang on expectations with a previous result of -1.7%. The Corporate Service Prices Index for March has come in better than expected at -2.1% Vs a forecast -2.6% and a previous of -2.6%.

The USD/JPY is unchanged at 97.85/90.

So much for EURO and Cable holding above 1.3130 and 1.4700 and enticing some buying interest. Lets see if the 1.3100 level provides us with any support this morning.

The real GDP of South Korea increased 0.1% q/q in Q1 2009 helping it avoid a second straight quarter of negative growth.

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