USD set for test of the lows as Trichet likely to deliver another hawkish performance at today's ECB press conference. BOE eyes 25 bp rate cut.

USDJPY sharply lower on Singapore move to strengthen its currency as inflation fighting measure.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• New Zealand Mar. Business PMI out at 48.3 vs. 52.2 expected
• UK Mar. NIESR GDP Estmate out at 0.5% as expected
• Japan Feb. Machine Orders rose 2.4% YoY vs. 0.9% expected
• Japan Feb. Adjusted Current Account out at ¥1461B vs. ¥1650 expected
• Australia Mar. Unemployment Rate out at 4.1% as expected vs. 4.0% in Feb.
• Australia Mar. Employment Change out at 14.8K vs. 10.0k expected

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

• France Feb. Industrial and Manufacturing Production (0645)
• Sweden Feb. Industrial Production and Orders (0730)
• Norway Mar. Producer Prices and CPI (0800)
• UK Feb. Visible Trade Balance (0830)
• UK BOE Announces Rates (1100)
• EuroZone ECB Announces Rates (1145)
• EuroZone ECB's Trichet to hold Press Conference (1230)
• US Feb. Trade Balance (1230)
• US Weekly Initial Jobless Claims (1230)
• Canada Feb. International Merchandise Trade (1230)
• US Fed's Bernanke to Speak about Financial Markets (1700)
• Japan Mar. Domestic CGPI (2350)

Market Comments

Singapore's MAS overnight decided to allow the SGD to trade stronger versus the USD by shifting the trading range for its currency. The bottom fell out of USDSGD on the news and other Asian currencies strengthened in sympathy. USDJPY swooned all the way through 101.00 on the news. The JPY was already moving stronger on a souring mood in equities and renewed signs of risk aversion, and this news simply accelerated the move. Asia is feeling the brunt of world inflation problems as basic foodstuff and other prices are spiraling out of control and their currencies are still too closely linked to the USD and its inappropriate monetary policy considering the state of their economies and inflation levels. Rice prices have been the big focus, and now governments are moving in with protective measures like export bans and price controls that will only exacerbate the price spike for what little rice is allowed to trade. Oil also spiked to new all-time highs yesterday on a report showing a strong draw on inventoriesvin the US, though the rally was no doubt also exaggerated by the fall in the USD.

The move to risk aversion yesterday didn't seem to have any single trigger and may have been a result of the lack of activity emboldening the pessimists to put back on the risk aversion trades as things seemed to have quieted down after last week's huge rally in risk appetite. The news that Lehman and Morgan Stanley are holding more so-called "Level 3" assets (a.k.a. toxic rubbish from the easy-credit era with unknowable value....) certainly helps to remind us of the risks that the big banks still run. Regardless, after days of very indecisive activity across markets, we saw yields and equities falling and credit spreads showing renewed signs of worry. Traders increased bets that the Fed will cut by 50 bps at the end of the month. And with the unmovable Trichet and ECB likely to maintain the 4.00% handle for now, this puts the USD on a weak footing. We can hardly expect anything from Trichet but another round of jawboning on inflation risks, particularly with oil spiking to new highs yesterday. Still, a Wall Street Journal article this morning points out the important divergences within the major EuroZone economies, with Italy now moving into recession, Spain undergoing a hard landing, and Germany weathering the turmoil just fine, thank you very much. It will be interesting to see how Europe and the ECB deal with these divergences if they extend going forward. Another hawkish performance from Trichet is likely to see EURUSD probing 1.6000+

The BOE is of course also up today with its rate announcement. While the odds for a cut today actually eased lower, the consensus is still that the BOE will cut 25 bps to 5.00%. We go with consensus and have a hard time calling a bottom here in GBP, unless Trichet comes out with a dovish performance, an extremely low odds proposition.

The trade releases today remind us of the trajectories of various nations' terms of trade. China, with its US export market slowing, commodity prices rising, currency strengthening (though not much yet vs. Euro...) and internal consumption racing higher, could move into an outright trade deficit by the end of the year if these trends continue. China releases its trade report in Asia' Friday session. Meanwhile, the US ex Petroleum trade deficit is on a rapidly shrinking trajectory (high oil prices will hide this phenomenon in today's trade balance release.) Canada's terms of trades are worsening due to its strong currency, and the UK has seen its trade deficit growing for years now, with no end to the trend in sight.

It looks like the USD will trade to new lows into the end of the week ahead of this weekend's G-7 meeting in Washington. There has been little further noise from the powers that be on currencies and the focus at the g7 on financial stability and measures to deal with the recent turmoil may prevent any interesting rhetoric on currencies for now. It also appears that risk aversion may be back for now - though a deeper sell-off in equities is needed for confirmation.