JPY blasts stronger on renewed bank woes. USD holds up relatively well, but needs follow up move stronger to keep rally hopes alive.

USDCAD pulls back to parity. AUD remains resilient after RBA, strong data.

MAJOR HEADLINES – PREVIOUS SESSION

• Australia Q1 Current Account Balance out at -19.5B vs. -20.5B expected
• Australia Apr. Building Approvals out at 5.2% YoY vs. -3.3% expected
• Australia RBA left the Cash Target rate unchanged at 7.25% as expected

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• Norway May PMI (0700)
• EuroZone Apr. PPI (0900)
• EuroZone Q1 GDP (0900)
• Major Central Bank Heads Bernanke, Trichet, Shirakawa to speak in Barcelona (1300)
• US Apr. Factory Orders (1400)
• US Weekly ABC Consumer Confidence (2100)
• UK May Nationwide Consumer Confidence (2301)
• Australia May AiG Performance of Service Industries (2330)

Market Comments

Risk aversion bit deeper yesterday with a very strong recovery in world bond markets and a sharp sell-off in equities to start the week, the higher than expected ISM and ISM prices paid notwithstanding. The FX market responded with an impressive performance from the JPY and CHF, with the former finally strengthening sharply across the board after weakening against most currencies for the last 3 weeks or so. It appears we may finally have our pivot point on the risk appetite front - stay tuned. The trigger for this move to risk aversion was the UK's Bradford and Bingley's woes that surfaced yesterday, and this news was followed with news that S&P was slashing its ratings for three of the major US investment banks on fears of further write-offs. Still, it seems the market was ripe for a catalyst anyway, as news of this nature has failed previously to trigger the kinds of moves we saw yesterday.

The USD managed to survive the shift to a risk averse market quite well so far and that remains the key: as worries about global growth become manifest, we would prefer to see USD and especially JPY strength and for the growth/commodity currencies and the EUR to suffer the most. That scenario fits best with the overall view that we will see a continued unwinding in risk appetite and a recoupling of the major economies. To support this view in the short term, we'd like to see EURUSD remain below its 21-day and 55-day moving averages, and to see a follow up move lower through 1.5460.

USDCAD managed to pull all the way back above parity yesterday and the 200-day moving average. A follow up move higher will put it firmly back in the old range. If we see this development, we may soon finally be able to talk up the prospects of a real uptrend starting if the pair is able to keep the momentum up and work its way through the next layers of resistance (see chart below). Also, have a look at CADJPY as a potential downside play if risk aversion deepens.

Australia's RBA left rates unchanged at 7.25% as expected, and gave little reason to increase the belief that they may raise rates later this year, as has recently been priced into the forward expectations, though 2-year rates have fallen rather sharply over the last 3 days in Australia. The RBA said that it thought growth would moderate, that household credit is weakening significantly, and that inflation will decline over time if demand slows even if inflation is "relatively high" in the short term. It's more than a bit surprising to see AUD remaining as strong as it has been with increasing signs of risk aversion in the market. The better than expected current account balance and building approvals data overnight offered some support.

Chart - USDCAD
USDCAD managed to claw its way back to parity yesterday, which also coincides with the 200-day moving average. If the pair is able to rally above this key resistance level, then we may soon be able to talk about a real up-trend underway after months of range bound torpor for the pair. The next big levels are the descending line of consolidation coming in around 1.0280 at present, followed by the ultimate resistance at the 1.0380 high from January.