There remains a bullish view on the dollar as a cyclical play, although the view appears foggy in the near term, particularly given the recent weak economic data releases globally. From a relative perspective, the dollar and the yen should perform well should the US lead the global economy out of the current downturn. It is important to note, for the record, I don't anticipate a sustained recovery, rather a 5-10 year span before some real light is seen. Global central banks will remain vigilant on deflation and tight credit and the recent dissent among ECB officials show that despite signs of improvement, the situation remains fluid. The Fed's aggressive actions should benefit the dollar as credit conditions ease but debasement fears led Fed Chairman Bernanke to unusually speak for dollar strength. It is natural that the FED be wishy washy in an environment where central banks are subtly working to weaken their currency.

GDP figures for the Eurozone, Germany and France all came in worse than expected. Eurozone GDP was -4.6% y/y versus consensus -4.1% y/y, German GDP -6.9% y/y versus consensus -6.0% y/y and French GDP -3.2% y/y versus consensus -2.5% y/y. The rate of contraction in the Eurozone is the sharpest ever. Despite the disappointing data, our economists maintain that this represents the bottom of the cycle and emphasize that many signs point to an improvement in the second half of 2009 and into 2010. But the backward-looking downward surprise also means that 2009 GDP estimates are likely too optimistic. In other data, the flash estimate of Eurozone CPI was as expected at 0.6% y/y and core slightly exceeded expectations at 1.8%. The inflation reading comes after several ECB officials commented that current ECB rates are appropriate and played down deflation risks. Executive Board member Gonzalez-Paramo said the ECB is not currently looking to increase the amount of asset purchases but ECB officials appear conflicted on that point. Public disagreement among ECB officials could mean a choppy May for EURUSD but we maintain our 1m EURUSD forecast of 1.30.

Domestic CGPI came in much lower than expected, coming in at -0.4% on the month, -3.8% on the year. The figures underscore growing deflation risks in Japan, especially with import prices falling a massive -23.9%. The JPY's strong appreciation in real terms over the course of the year underpinned the move, though the general drop in import demand likely played a key role. The drop in wholesale prices on an annual basis is the biggest in 22 years. On the output front, machine orders fell 22.2%y/y, slightly better than expected. The trade cycle is clearly bottoming out but we believe the BoJ would need to urgently address deflation risks. The central bank has so far generally avoided the issue and pursued some mild forms of quantitative measures. Knowing that historical attempts at explicit quantitative easing failed to pull the country out of deflation may be holding the BoJ back, but it is becoming clear that some new measures are needed soon to prevent a new spiral. Next week's GDP figures are expected to show a record quarterly decline in excess of 15% on an annualised basis.

NZD: Retail sales fall
New Zealand's retail sales figures came in weaker than expected, coming in at -0.4%m/m. The seasonally adjusted volume fell 2.9% on the quarter (vs. -1.5 cons.) and is a record. Our economists note the weak Q1 retail sales numbers is a risk for Q1 GDP and suggests downside risk to our forecasted 0.7% q/q contraction. Further cuts in the OCR are likely on the back of this result and our economists still look for two more 25bp moves in the upcoming months, leaving the OCR at 2%. Overnight the New Zealand treasury warned that the economy is likely to struggle for much of the year as the recession likely extends into Q3 2009, and the IMF also noted that further easing may be warranted. We still expect the NZD to underperform within the commodity bloc.

Tags: Risk Appetite