New week gets underway with EuroZone and US manufacturing surveys up today. The USD may look to extend on last week's gains.

Australia posts ugly Retail Sales and Manufacturing data as the tight range in AUDUSD for the last two weeks comes under fire to the downside.

MAJOR HEADLINES – PREVIOUS SESSION

• Australia May Performance of Manufacturing Index fell to 51.2 from 52.7 in Apr.
• Japan Apr. Labor Cash Earnings rose 0.6% YoY vs. 1.3% expected
• Australia Apr. Retail Sales fell -0.2% vs. +0.2% expected
• Australia Apr. HIA New Home Sales rose 0.1% MoM.
• China May CLSA Manufacturing PMI fell to 54.7 from 55.4 in April

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

• Swedbank May PMI (0630)
• Switzerland May SVME PMI (0730)
• EuroZone May Manufacturing PMI (0800)
• UK May Manufacturing PMI (0830)
• US May ISM Manufacturing (1400)
• Australia Q1 Current Account Balance (0130)
• Australia Apr. Building Approvals (0130)
• Australia RBA Cash Target (0430)

Market Comments

Friday proved to be a day of consolidation as the USD lost some ground after three days of rapid strengthening earlier in the week. EURUSD attempted below the trendline support, but the try was aborted and the pair closed the day higher. USDJPY hasn't yet managed to follow through the 105.70 resistance area. The move stronger so far only looks like a gentle consolidatory move. Last week's bout of strengthening may have broken the weaker USD trend for now. The next line of resistance for the USD is not far away, however, and will decide whether this strong USD move has legs. Again, our macro view doesn't sit well with the apparent drivers of the USD strength, namely that the move coincided with strong equity markets and rapidly increasing yields. If our view is that the growth hopes are overstated and that risky assets will decline, then the USD will have to manage the transition and be able to strengthen in this kind of environment as well. USD strength in this environment would be less about "Look at the great prospects for the US economy now that the bottom has been reached" and more about "Gee, it's starting to look pretty bad elsewhere, too."

One place where it is starting to look less good is Australia, with ugly Retail Sales and Manufacturing Data overnight providing impetus for another try at the recent lows of the persistent range in AUDUSD. In a slowing global economy, we have a hard time getting excited about the Aussie's prospects. Still, AUD has managed to brush off the sharp fall in commodities so far. It would have a harder time brushing off a sell-off in equities and rally in bonds, however. The AUD needs to make a stand here if it is to keep the bull rally alive, as a close well below the 21-day moving average in AUDUSD would threaten much larger declines going forward. This is a busy week for Australian data, with RBA Cash Target (no change expected) and Building Approvals up tonight, GDP and Services Survey on Wednesday and Trade Balance on Thursday.

GBP fell out of bed to start the week on news that Bradford and Bingley Plc, one of the UK's largest mortgage lenders, will have to raise additional capital as provisions for bad debt are being expanded. This reminds one of the risks to the UK economy from the housing bubble unwind, which is in full swing. The move came after a short squeeze in GBPUSD positions on Friday. The pair looks toppish as long as last week's highs hold as resistance.

CAD is another currency to follow this week, with volatile oil prices and a confusing set of recent fundamental inputs. The Bank of Canada has recently begun to sound the warning bell on inflation after previously appearing to be the most dovish of all the major central banks. This in addition to record oil prices drove USDCAD to new recent lows close to 0.9800. But then CAD weakened sharply on Friday after a surprisingly weak GDP reading - the first drop in the quarterly growth in 5 years. This week sees the Ivey PMI on Thursday and the Canadian employment report on Friday - the same day as the US employment report. The USDCAD rally will face a key test at parity - which has been a huge psychological barrier on the way down and now coincides with the 200-day moving average. Long term, we look for a very large rally in this pair - but will this be the week that the pair scratches back above parity?

For those looking to put on a risk aversion trade and avoiding the USD question all together, the bearish rejection of the latest EURCHF rally attempt looks rather interesting. The pair turned tail right at the 200-day moving average and may be ready for a bigger sell-off if other risky assets show.

Chart: AUDUSD
AUD has managed to largely hold its own against the USD as equity markets have remained relatively buoyant and bond yields have risen sharply of late (AUD tends to thrive on healthy risk appetite). But with increasing signs that the Australian economy is rolling over and the risk of the global growth picture continuing to sour, we wonder how much longer the AUD strength can continue. For AUDUSD, the 21-day moving average seems to coincide well with the recent uptrend and may be a focus, as will the 0.9500 area that marks the old high. A close deep below these levels could scotch the rally for now and open up further downside, with the 55-day moving average as the next area of obvious interest.