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Yesterday was a weird day. I say that because the correlations seemed all screwed up. Bonds were weak, commodities were basically flat to mixed (except for the precious kind), US stocks flattish, and yet the currencies were signaling risk appetite is back; well, except for the yen which strengthened big time yesterday (before intervention this morning). So we have considerable mixed signals on whether risk was on or off or taking a vacation.

As we all painfully know at times, risk ebbs and flows. We all do our best to determine ahead of time how risk will be meandering day to day, at least for shorter-term time frame positioning. One of the monikers we were hanging our hat upon has been the gold versus FX Trading connection. It has been fairly tight and possibly logical. But in the famous words of the former great boxer Roberto Duran-no mas!

I used the phrase "possibly logical" above, to describe the gold versus FX Trading relationship. Our story has been that risk in the eurozone has been the driver of players to both the dollar and gold for safe haven. Thus, we see gold rising and the dollar rising when the euro falls. It was not the normal correlation which over time has been even tighter -- strong gold and weaker dollar on the idea gold has to maintain its global purchasing power across a basket of international goods and because it is priced in US dollars it goes up when dollars fall in value against the currency pack.

Back to the original point: since the correlation between FX Trading that was tight, has recently blown apart, does it tell us we are again in a position to see a significant weakening of the buck based on risk-on (risk appetite) and recovery clearly underway with the US lagging badly?

The correlations continue to look a bit screwy again this morning. Long bonds are down ¾ of a point, normally a "risk on" indication, yet US stocks a la S&P futures are bidding slightly lower. Gold and the euro are flat. The big liquidity move from Japan this morning and big run up in the Nikkei did little to help commodities-oil and copper lower so far.

The economic news doesn't seem to be giving us any more clarity than the correlations. Today a survey of Asian companies showed sentiment declined for the third quarter, despite all the seemingly good news about China being back on track. UK inflation above expectations, but the eurozone flat to down on the inflation front is the report today. Australian consumers have grown less optimistic despite their supposed roaring economy. And despite all the new confidence from US economists telling us we will not follow Japan down the deflationary path (great article on that subject by Robert Feldman of Morgan Stanley here) and there is no way a double-dip recession will happen, yet news from The National Association of Independent Business this morning isn't very promising and this where many US jobs are supposed to flow from:

Optimism rose a bit in August, but remained stuck in the recession zone established over the past two years, 88.8 is not a good reading and is typical of recessions over the past 35 years of FX Trading surveys. Weaker expectations for the economy and sales produced the July decline, and were the major contributors to the improvement in August - but that isn't saying much. Owners are still expecting sub-par growth in the second half. Half of the Index components posted declines, four posted gains and one was unchanged. Although the macro measures of inflation indicate there is still some, more owners (by as many as 21 percentage points) have reported cutting average selling prices than raising them for 21 months in a row. At least in the small business sector, it's looking like "deflation". Forex Trade Point