USD weaker again overnight despite lack of catalysts. London coming back on line today after 4-day holiday weekend.

Risk appetite has recovered dramatically since Friday - favoring JPY and CHF weaker - how long will this last? US house price data up today.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• US Feb. Existing Home Sales out at 5.03M vs. 4.85M expected
• New Zealand Feb. Credit Card Spending rose 8.1% YoY vs. 8.7% in Jan.

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

• Switzerland Feb. UBS Consumption Indicator (0900)
• New Zealand Q1 Westpac Consumer Confidence (1200)
• Canada Retail Sales (1230)
• US Jan. S&P/CaseShiller Home Price Index (1300)
• US Mar. Richmond Fed PMI (1400)
• US Jan. House Price Index (1400)
• US Weekly ABC Consumer Confidence (2100)
• Japan Feb. Merchandise Trade Balance (2350)
• Japan Feb. Corporate Service Prices (2350)

Market Comments

With London back on line this morning after a long 4-day Easter weekend, we now get down this week to the business of deciding whether last week's reversal to a stronger USD continues, or whether this is just a bump in the road for the overall weak USD trend. As we pointed out Friday, the weekly candlesticks certainly look promising for USD strength, even if the overnight moves are not comforting for the USD bullish view. EURUSD bounced from a very technical level yesterday in the big picture (the 0.382 Fibo for the big move from 1.4439 to 1.5904 came in at 1.5345). The rally from yesterday's lows extended rather sharply overnight to 1.5570. It is rather odd to see such a large move in the Asian session, especially with little news to have triggered such a move. Perhaps some players couldn't wait for Europe to come on line to put on fresh USD shorts as the bounce in EURUSD materialized at such a technical level yesterday.

The last time we got a move of this size in the Asian session was actually very recently, but that was after the previous weekend when the Fed made the extraordinary moves on Sunday evening, announcing the Bear Stearns bailout and lowering the discount rate. Considering the timing of the move and the market conditions as it unfolded, therefore, we look on this weak USD move overnight with a bit of suspicion. We need normal market conditions to get a better read on things.

Yesterday saw a very enthusiastic response on the risk appetite front in the US to the news that JP Morgan would raise the price it will offer for the Bear Stearns and the better than expected US existing home sales. US rates shot higher, with the yields at all points on the curve recovering all of the lost ground from the previous three trading days. The stock market rose as well and the commentators trumpeted that this was the best two-day performance in 5-years. On the currency front, this resulted in a strong move higher in the EURCHF barometer, among other moves. The JPY crosses were higher on this as well before offers came in rather early in the Tokyo session. A new recent high in USDJPY above 100.90 was roundly rejected, and now the pair is looking at the key short term support at 100.00 for direction.

Gold seems to be moving in line with the USD and commodities in general will need to decide whether they slavishly follow the USD move or whether fundamentals have something to do with price. AUDUSD took its lead from the risk appetite picture, and after closing below the 55-day moving average for three days, zipped back higher through it overnight and confusing the technical picture. NZDUSD has so far stopped short of falling through its 55-day moving average. We've been looking for the commodity currencies to suffer the most in a risk averse environment, but the huge bounce over the last two days in stocks and yields has plugged the holes in the dike for now for these currencies.

Looking ahead at the rest of the week, we see few big fundamental data catalysts outside of the US house price index data for today and the US New Home Sales Wednesday and the German IFO tomorrow. The USD scenario is at a tough technical crossroads here. Short term guesses at direction seem treacherous, but last week's big weekly gain for the USD may be an advanced warning of a bottom forming in the days and weeks ahead.

As a side note, we suspect that this dramatic recovery in risk appetite will once again see disappointment down the road, but timing is a very tough call in this market as huge swings take place every day on the latest headlines. In any case, the end of the Japanese financial year is fast approaching (next Monday) and JPY pairs are likely to remain volatile. We suggest the downside risk in these pairs is still very large, but would wait for technical signs that this rally is being rejected before putting on risk.