We still favour the dollar at the current juncture though it continues to face headwinds from increasing risk appetite and improving price and volume conditions. The commodity currencies, in particular, have markedly strengthened against the dollar while investor risk-seeking has interestingly enough benefited the dollar against the euro, judging from the breakdown in the correlation between EURUSD and global equities. However, there still remains significant event risk, mostly concerning the financial sector. Sentiment remains fragile and any negative earning surprises as the earnings season gets into full swing would shift sentiment back to safe havens like the dollar.

ECB Governing Council Member Orphanides said the risk of deflation has increased recently and that additional policy easing could be warranted. Orphanides said he favours the current ECB approach of rate reductions and cash lending to banks but did not rule out any future measures. He said that credit conditions could ease further if commercial paper or corporate bond rates are also reduced. In contrast, German Finance Minister Steinbrueck remained concerned last week that the world could face an inflation crisis in the medium-term given the large amount of money that is being pumped into the financial markets. Steinbrueck also preferred to wait to see how the already launched stimulus measures work before contemplating a third stimulus package. He submitted a program to Chancellor Merkel that would use government funded bad banks to remove toxic assets from bank balance sheets. It is not yet clear whether the plan will bear any resemblance to that proposed by the Irish government last week for dealing with problem property-related loans in the Irish banking system. Meanwhile the ECB is still adamant that deflation risks are low, even though it has acknowledged that negative inflation for a few months is a likely prospect up ahead. We remain cautious on the euro and maintain our 1m EURUSD forecast of 1.30 and modestly lower in the coming months, until adjusted. The EUR has remained soft as we have covered in detail in the Pro Traders Club sessions, further supporting our EURGBP short trade call.

BoJ Deputy Governor Yamaguchi appeared to lend his support to the government's JPY 15 tln fiscal stimulus package announced last week, pointing out that fiscal stimulus is "indispensable" in the current environment as "there is a limit to what monetary policy can do". In other words, the Central Banks have limited manageability over the massive strength of the financial markets and global mass psychology.

Data out this morning pointed to a modest increase in business confidence with the reading rising to -13 from -22 previously. Although an improvement on last month's figure, and a substantial improvement on January's all-time low, the data confirms that a pessimistic mood persists amongst Australian businesses. Meanwhile, China released its trade balance for March on Friday and showed further declines in both imports and exports. Interestingly however, China imports from Australia actually grew in y/y terms in contrast to imports from China's other major trading partners. Imports from the US fell by 12.7% y/y, a slight improvement from the -21% y/y rate recorded over January and February. Australia sends approximately 80% of its exports to China and any pick-up there should be beneficial for the AUD. In NZ this morning, retail sales for February rose by 0.2% m/m, after falling 1.2% m/m in January. The data does not change the view about the underlying dynamics in the NZ economy and we continue to call for a 50bp reduction in the OCR to 2.5% at the end of this month. We remain negative on the NZD relative to the AUD.

The BoC Loan Officer Survey and the BoC's Business Outlook Survey showed that conditions remain difficult in Canada. Overall business lending conditions remain tight but have eased somewhat on the margin. Business sentiment remains negative. While some indicators have inched up from historical lows, the results of the spring survey continue to suggest a weak outlook for the Canadian economy. BoC officials have taken a cautious stance on non-standard policy measures. If anything, the data will reinforce them to stay on the sidelines for now. We expect domestic data to stay subdued and should risk appetite ease.

Source: UBS, Bloomberg, Chris Lori CTA

Tags: ECB