In recent days, the Australian dollar (AUD) has maintained relative strength, shrugging off mixed data and the US political pressures that have fueled overall risk aversion across the FX markets.

Risk currencies seesawed in Asian and early-European trade today, first selling off against the US dollar (USD) during the Tokyo session and then recovering somewhat by the London open as equities rose by more than 1%. The dollar continued to recover against the Japanese yen (JPY), rising to a high of 97.80 on better risk flows and hopes that a resolution of the nearly-two-week-long US budget stalemate will soon be reached.

On the data front, the economic calendar in Europe was light, but in Australia, the employment report produced mixed results. Australian employment figures rebounded from last month’s losses, but the 9.1K gain was less than the 15K forecast. Full-time employment rose by 5.1K, while part-time jobs gained 4K.

The unemployment rate declined to 5.6% from 5.8%, but the reason for the drop was due to a smaller participation rate of 64.9%, down from 65% the period prior.

Overall, the picture was a bit confusing for the currency market, and the Australian dollar (AUD) initially rose but then tumbled hard as profit taking kicked in and stops below the .9400 barrier sent AUDUSD to a low of .9387 by mid-day Tokyo dealing.

The pair later recovered to .9430 as the latest data left the market with a general consensus that the Reserve Bank of Australia (RBA) is likely to remain stationary as long as employment rolls continue to expand, even at a modest pace.

Employment is a lagging indicator, and other points in the Australian economy, including business and consumer sentiment, have turned higher, indicating that the nation’s slowdown may have troughed.

The Aussie has been the "teflon currency” in the FX market over the past week, showing relative strength against both the euro (EUR) and British pound (GBP). However, the .9500 level in AUDUSD continues to provide strong resistance, and the pair is unlikely to clear that barrier until Australian labor conditions improve.

US Budget Hopes Fuel USD/JPY Rally

Elsewhere, the focus remains on the negotiations in Washington, and markets continue to hope for a last-minute settlement ahead of the debt ceiling deadline. Mincing no words, Organisation for Economic Co-operation and Development (OECD) Secretary Angel Gurria warned that a failure to reach a deal would send the OECD into recession, putting further pressure on US policymakers to come to an agreement.

There is evidence that both sides may be willing to compromise slightly to raise the debt ceiling for a short period in order buy time to work out a more comprehensive agreement. President Obama has invited Republicans to the White House for further negotiations, and the markets are clearly hopeful that an all-out financial crisis will be averted.

With the US government on partial shutdown the economic calendar in the US carries only weekly jobless claims, which have remained surprisingly robust amidst all of the political uncertainty. The expectation is for a near match of last week's 307K reading.

If today’s rhetoric from Washington does indeed appear to be more conciliatory, then the dollar should continue to recover against the yen, with USDJPY longs eying the 98.00 barrier as the next target in the pair’s recent recovery.

By Boris Schlossberg of BK Asset Management