USD trading in no-man's land. USD direction still uncertain as Friday's lows haven't held convincingly.

Quiet week on the economic calendar after tomorrow's batch of US data. Bond markets still pressuring JPY.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand May Performance of Services Index rose slightly to 49.1 from 48.9 in Apr.
• China May Industrial Production rose 16.0% YoY as expected and vs. 15.7% in Apr.
• New Zealand May Non-resident Bond Holdings rose to 77.3% from 76.0% in Apr.

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

• Switzerland Adjusted Retail Sales (0715)
• Sweden May Average House Prices (0730)
• Norway May Trade Balance (0800)
• US Jun. Empire Manufacturing (1230)
• US Apr. Net TIC Flows (1300)
• US Fed's Bernanke to speak at Senate Finance Committee Health Summit Event (1400)
• US Jun. NAHB Housing Market Index (1700)
• US Fed's Lacker to Speak on Economic Outlook (1700)
• Australia RBA June meeting minutes (0130)

Market Comments

The weekend's G-8 meeting saw no real developments on the currency front, as widely expected. US Treasury Secretary Paulson reiterated the tired line that a strong USD is in the nation's best interests. Virtually all of the meeting focused on crude oil and food prices and the difficulty that the recent price rises are creating for the global economy. The most interesting aspect of the latter subject is the degree to which a weak USD affects these prices and there a wide variety of opinions on this. Paulson suggests that oil prices, for example, are mostly going up on real supply and demand issues, while we and others maintain that there is some degree of reflexivity evident in the USD-commodity complex equation.

So far, the USD has failed to post a fully convincing break stronger. The USD index closed at a new high since February of this year, but wasn't really holding its highest levels into the close and is coming out of the Asian session looking a bit weaker than the USD bulls would like it to. EURUSD, for example, which traded close to 1.5300 on Friday, has not held below the 1.5367 low posted just before the previous ECB meeting, nor has it broken the 1.5287 May low. So in the big picture, the pair is still trading in the range. A strong rally through 1.5450 today would disappoint the bulls further and continue to support the range-trading scenario.

The key market to watch this week may be the bond market, which is in a run-away move lower. This move has kept the low-yielders on the weak side. We wonder how much longer this move can last and will be on the lookout for a rally (especially at the long end) and the effects of such a rally on currencies. A rally would most certainly produce a stronger JPY and CHF, but the reaction of the USD to such a development will be key in determining how much potential for further strengthening the US has in the medium term. The JPY crosses have been very weak in recent weeks, with EURJPY closing higher every week for the last 5 weeks in a row.

Looking at the economic calendar for the upcoming week, the US calendar is one of the quietest in recent memory, with tomorrow's Q1 Current Account Balance, May PPI and May Housing Starts and Building Permits the only day of interest. The rest of the week only features the weekly jobless claims number and Philly Fed on Thursday. Elsewhere, the UK seems to have the busiest calendar, with tomorrow's CPI/RPI, Wednesday's BOE Minutes and CBI Industrial Trends Survey and Thursday's Retail Sales. GBP rallied sharply against its European counterparts last week, but has failed to show a follow-up move stronger. The lack of follow-through suggests a rising potential for the GBP to move weaker again if we don't see the follow-up move today or tomorrow.

Chart: EURUSD
Note the key support that EURUSD needs to break in order to unleash the downside potential toward 1.5000. It was somewhat disappointing that the pair could not hold below the 1.5367 old low on Friday. The move leaves the pair in no-man's land for now. A strong reversal back above 1.5500 would increase the odds that we test the high side of the range again, while we need a move below the 1.5287 area (low since early March) to trigger the preferred scenario toward 1.5000.