G3: on a long term basis the EUR continues to look overvalued against both the USD and JPY. Its recent overshooting against both currencies has been driven by the rebound in risk assets since March and concerns over America's credit ratings. But Euro zone officials again voiced concern over the level of the EUR last week above 1.40 while the deteriorating fiscal picture in Latvia has raised the risks of devaluations in Eastern Europe. The key data releases to watch this week will be US retail sales and Euro zone inflation data. We think the EUR will struggle at its current elevated levels following last week's US payrolls data and European warnings on exchange rates. In addition, the upcoming G8 finance ministers meeting in Lecce, Italy on June 12-13 may give further opportunities for official comments on currencies.

Europe: Sterling has been hurt by UK political uncertainty. PM Brown's position remains tenuous following the weekend European election results. This will keep dragging on the GBP now. Elsewhere in Europe, the SEK is also likely to stay under pressure given devaluation concerns in Latvia while the CHF faces the risk that the SNB surprises the market again at its board meeting next week on June 18. The NOK however should benefit against the SEK and GBP if this week's inflation data in Norway doesn't disappoint the market
Commodity Bloc: The commodity currencies were all hit last week by the rebound in the USD. This week RBNZ meets and our economists are in a minority expecting a 25bps cut. This would support the AUDNZD cross further. We also still prefer AUDCAD to trade higher after the Bank of Canada noted CAD strength as a risk to its outlook last week but 0.90 will be important resistance.

Tags: USD