Trichet in China this week. Carry Trades bouncing once again as Asian stock markets blasted higher to start the week

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• US shoppers came out in force on the day after Thanksgiving as retailers racked up a 8.3% sales gain compared with last year's "Black Friday".
• Australian Elections: the Labor Party's Kevin Rudd to become next prime minister as John Howard era draws to a close.
• New Zealand Oct Trade Balance out at -690M vs. -550M expected
• Sweden Oct Trade Surplus out at 11.4B vs. 7.5B expected

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• Hungary Base Rate Announcement (1300)
• ECB's Trichet to Speak in Mumbai (1600)
• Japan Oct Corp service Prices (2350)
• Japan BoJ's Fukui to speak in Tokyo (0000)

Market Comments

The USD is having a hard time finding support to start the week despite the good news out from retailers of a strong results for Black Friday, the Friday after Thanksgiving that is considered the start of the Christmas shopping season. The glass-half-empty folks are trying to tell us that the strength in sales is only due to unprecedented incentives that struggling retailers are employing to generate traffic in stores. In any case, the interest rate view in the US is so far not being backed up unequivocally by the economic data. It is remarkable that last week, US 2-year rates touched just below 3.00% and the 10-year touched 4.0% for the first time since 2005. These are extreme levels and it's hard to imagine that the panicky action in the Treasury market can keep up these kinds of yield differentials with the rest of the world.

The Chinese are transparently on a charm offensive as Sarkozy's visit to China is underway and ahead of Trichet's visit tomorrow as Airbus announced an enormous 160-plane deal with china worth some EUR 10 billion or more after just last week we saw Airbus complaining of "life threatening" weakness of the USD. Other French companies were also awarded contracts with China over the last several days. But Trichet and company will be looking for more as the EUR has suffered too much strengthening at the hands of the artificially weak oil exporting and Asian currencies. Look for signs of a quicker pace of strengthening in the USDCNY to see if we are finally seing a more definitive move in CNY.

Further on the "global imbalances" front, Saudi Arabia joined the UAE in cutting rates to match the recent cuts by the Fed and stem revaluation speculation. The GGC summit next week will be key for any announcement surrounding the nature and extent of any GCC currency revaluation.

The Australian elections unfolded largely as expected and we are seeing a "sell the rumor, buy the fact" situation for AUD - though its strength since Friday is also due to the renewed surge in gold prices and the equity rally. This rally represents an opportunity to find better levels at which to sell further down the road as global growth may be decelerating. Labor leader Rudd rode to power on Iraq and global warming issues more than economic policy issues as the Australian economy has been performing strongly. But down the road, Labor policies could drag on the AUD if unions become more active and disruptive (the Labor party has a pro-union stance, and one could imagine with the enormous success of Australian resource extraction companies in recent years, that unions are chomping at the bit to demand a higher portion of the profits for workers.)

Trading Strategies

Trade selection is tough in the current environment. Last week, as the credit panic appeared to be heading into full swing, it looked as if the JPY crosses were primed for a meltdown - but they seemed to have survived once again as stocks are looking bid today, and EURJPY bounced back sharply from its attempt at new lows below 160.00 late last week. USDJPY also bounced, and the old low in the 109.10 area will be key resistance for maintaining the bearish view there.

The overall USD view is difficult as well, as the weak USD trend is very clear, but EURUSD and USDCHF saw big one-day reversals in thin markets on Friday - should those signals be ignored due to market conditions or is 1.5000 a significant barrier for now? Certainly,  we need to see EURUSD back below the 1.4780/50 zone before we see technical confirmation of possible further USD appreciation.

It appears that for the very short term - the risk willing trades could bounce a bit further before any possible re-establishment of the risk aversion trade. Watch interest rate and credit markets for signals.