USD showing broad strength - how long will it last? AUDUSD looking at first key support on RBA outlook.

US ISM Manufacturing data on tap today. JPY more concerned with risk appetite than ugly Tankan survey results.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• Australia Mar. AiG Performance of Manufacturing Index out at 51.2 vs. 51.4 in Feb.
• Japan Q1 Tankan Large Manufacturer's Index out at 11 vs. 13 expected and 19 in Q4
• Japan Q1 Tankan Non-manufacturing outlook out at 13 vs. 10 expected and 15 in Q4
• China Mar. Manufacturing PMI out at 58.4 vs. 5.4 in Feb.
• Australia RBA Cash Target left unchanged at 7.25% as expected

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

• Germany Feb. Retail Sales (0700)
• Sweden Mar. Swedbank PMI Survey (0730)
• Switzerland Mar. SVME PMI (0830)
• Germany Mar. Unemployment Rate and Change (0855)
• EuroZone Mar. PMI Manufacturing  (0900)
• UK Mar. PMI Manufacturing (0930)
• EuroZone Feb. Unemployment Rate (1000)
• Canada Feb. Industrial Product Price and Raw Materials Prices (1330)
• US Mar. ISM Manufacturing (1500)
• US Weekly ABC Consumer Confidence (2200)

Market Comments

Yesterday saw EURUSD essentially completing the "test of top" scenario we favored, coming within 10 pips of the 1.5903 all time high posted two weeks ago. The rejection of the rally attempt yesterday pushed the pair back into the range, giving a possibly bearish short-term outlook, though the low volatility of the move was hardly impressive. A lot more damage needs to be done before we can start calling tops. Still, a test of lower support is now the default scenario as the USD is looking strong across the board. We eye 1.5660 as the first key level to test to the downside. Event risks abound through the end of this week. One ad hoc risk hitting the EURUSD lower as this is being written is the UBS news of another huge quarterly loss and gargantuan writedown. This reminds us that it isn't just the US banks that are having problems in the current environment.

The focus for today's data calendar is the US ISM Manufacturing number. The EuroZone PMI numbers are a bit less interesting since they recently began releasing preliminary readings for these surveys some 10 days before the final reading is released. The first March readings were marginally lower than Feb. readings.

In other USD crosses, NZDUSD is finally coming off heavily, something we've been expecting to see for some time and only now seeing unfold. We're trading below the key support at 0.7870 now, and wouldn't be surprised to see a sizeable drop lower (in fact, technically, a big drop is needed for confirmation that this was an important support level). NZD is weak across the board, in fact. GBPUSD looks very heavy indeed and we doubt whether the 55-day SMA will survive again if it comes under renewed attack (currently around 1.9800). Next stop may be the bottom of the old range below 1.9400.

AUD remained on a weak footing after the RBA kept rates unchanged and as metals prices continue to slip. Reasonably buoyant equity markets have kept the AUD from going into a complete route, however. Still, the Australian yield curve has been steepening rapidly since just before the last RBA meeting at the beginning of March (when the bank actually hiked 25 bps) as the Reserve Bank is making it clear that it will keep rates on hold for now as it expects the hikes of recent quarters to "take the pressure off inflation". As of this writing, AUDUSD is trading just at its 55-day moving average - this looks like a key level ahead of the recent 0.8955 low. The weak AUD actually pushed CAD stronger overnight, as it seems many of the big banks have been pushing the macro idea of long AUDCAD positions, and the rejection at the new top for this cross recently is likely seeing some unwinding of these positions.

The Tankan survey came out even worse than expected, as the sharp rise in the JPY, struggling US economy, and higher commodity input prices conspired to waylay Japanese exporter confidence. A large drop was expected, but the number was even worse than expected and is actually a new 4-year low. JPY weakened sharply from its strongest levels yesterday, particularly against the USD, as USDJPY traded back close to 100.00. (and then we got the UBS announcement pushing the JPY a bit stronger again in pre-Europe action - the headlines are a killer in this market when picking short term direction...and this reminds us that the JPY moves more on the risk picture than it does on Japanese fundamentals for the time being). On the positive side, the declines in the non-manufacturing part of the sector were far more modest than expected.

Chart: AUDUSD
AUDUSD at a crossroads here. On the one hand, the recent reversal back higher through 0.9120 was a bullish development, as the new lows and the break below the 55-day SMA (red line) were rejected. However, that move did not see significant follow through higher and now the pair is under renewed pressure, and would look particularly ugly if it trades back through the 0.9000 area.