Risky assets nearing key support levels - will risk aversion deepen? JPY crosses possibly in focus today.

Trichet not dovish enough to keep EURUSD lower. Key data from Norway today to test recent NOK strength.

MAJOR HEADLINES – PREVIOUS SESSION

• China Apr. Producer Price Index rose 8.1% YoY vs. 8.4% expected and 8.0% in March
• China Apr. Purchasing Price Index rose 11.8% YoY vs. 11.0% in Mar.

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

• France Mar. Industrial and Manufacturing Production (0645)
• Norway Apr. CPI (0800)
• Canada Apr. Unemployment Rate and Net Change in Employment (1100)
• US Mar. Trade Balance (1230)
• Canada Mar. International Merchandise Trade (1230)

Market Comments

Trichet's guidance at the press conference yesterday predominantly showed continued preoccupation with inflation and perhaps less of a leaning toward growth concerns than the market expected, but the rhetoric was about as "un-dramatic" as possible. One humorous episode included an inquiry into why the monetary policy statement didn't include the word "vigilant" to which Trichet replied that the word had not been removed from the ECB's vocabulary. EURUSD broke lower initially, but with forward expectations for ECB easing hardly budging, the break was quickly reversed as it there was no fundamental underpinning for the move. Now we have a hammer reversal formation and wonder if a test of top scenario, or at least a rally, is perhaps the more likely outcome in the coming cycle. The risk to the USD is that the perception changes in coming days/weeks that the US outlook is less rosy than the market has been hoping. USDJPY might be the better instrument for trying a weak USD trade as the JPY crosses are all developing some negative momentum. NZD is almost always our favorite currency to short - have a look at NZDJPY.

Carry trades remain under pressure as equities finally took a trip south and long treasuries rallied sharply. EURJPY closed on its 55-day moving average yesterday and AUDJPY is threatening its 200-day moving average again this morning. As carry trades are so dependent on the global macro picture, we have a look around at other markets: For some of the major equity market charts, it appears we have a fairly well defined rising trendline in places that will come under threat on any deeper sell-off. Bunds are also close to some interesting resistance now. In other words, the intermarket correlations seem poised for further meltdown if these moves carry on through the next lines in the sand. AUDUSD is another chart where volatility potential may be very asymmetrical, especially if the rising trendline from early this year gives way.

Watch the Norway CPI today for direction on EURNOK, which recently broke lower through an important trendline. A rise in risk aversion is a bit incompatible with a further drop in EURNOK, which has been pushed lower by the still hawkish central bank, the recent rise in risk appetite and of course higher oil prices. A big spike higher possible if risk aversion is hot and the CPI is not.

The US Trade Balance was disappointing last time around and we wonder if there is any room for tremendous upside surprise in today's release considering higher oil prices. Last time, the ex-Petroleum Trade Balance number also took a hit after showing a very promising trend lately.  Will this release provide further ammunition for new weak USD positions. It hasn't been a number in focus of late, but sometimes the market is just looking for an excuse to do what it wants to do anyway.

Charts: AUDJPY
AUDJPY looked like it might find resistance at the 200-day moving average, which was also a visually appealing resistance level as recent up and down waves have been of similar magnitude. Instead, we saw an additional small wave through this area and attempt at 100.00 before the recent sell-off rejected the rally. The status or this cross will depend highly on intermarket risk appetite. Note the head and shoulders formation in the stochastics. Is this cross ready for a fall?