After a slew of factors including the horrific events in Boston produced a huge selloff yesterday, risk currencies like the euro, Australian dollar, and others staged a surprising recovery overnight.

Risk currencies shrugged off dovish central bank commentary, weak economic results, and the lingering concerns over Monday’s terror attack in Boston to stage a short-covering rally after yesterday's massive selloff during North American trade.

The USDJPY, which at one time plummeted to 95.65, came roaring back to trade near the 98.00 level by mid-morning in today’s European session. The recovery in yen crosses helped to lift other high-beta currencies as the day progressed.

Earlier, in Asia, the release of the latest Reserve Bank of Australia (RBA) meeting minutes reiterated the theme that the central bank has scope to lower rates further, and policymakers went out of their way to emphasize that the Australian dollar remained "high."

The RBA stated, "Interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run. At the same time, the factors weighing on the economy—including the high exchange rate, the waning growth of mining investment, and fiscal consolidation—were likely to persist."

Australian monetary authorities clearly do not want to see the Australian dollar (AUD) above the 1.0500 level against the US dollar (USD), but the AUDUSD pair continues to be bolstered by carry-trade demand.

Although yields in Australia declined across the board today, the AUDUSD nevertheless recovered off the lows, trading well above the 1.0350 level as carry traders plowed into the pair. Unless the RBA actually follows through on its threat to lower rates further, the bargain hunters will continue to swoop into the pair on any dip in price.

EUR/USD Gets New Glimmer of Hope

Meanwhile, in Europe, the ZEW survey printed weaker than expected, at 36 versus 42, reflecting the tensions in March precipitated by the banking crisis in Cyprus and the overall decline in business activity. The euro (EUR), however, shrugged off the data and rallied towards the session highs, hitting 1.3090 before pausing.

The EURUSD pair remains remarkably resilient as it continues to hold above the 1.3000 level on market speculation that the worst may be over for the Eurozone and that economic growth—especially in Germany—will turn positive as the quarter unfolds.

A Volatile Day Is Likely Ahead for North America

In North America today, the economic calendar is relatively quiet, with only building permits, industrial production, and CPI on the docket. The most recent batch of US data has shown a slowdown in economic activity, and if today's reports continue this trend, the short-covering rally that took place overnight in risk FX may start to run out of steam.

The market appears to have calmed after yesterday's horrifying events in Boston, but if there are any fresh incidents today, risk aversion could return in a heartbeat. Therefore, trade in today’s North American session could be volatile, and reversals are possible as the day progresses.

By Boris Schlossberg of BK Asset Management