A noticeable void of fresh news has created a lacklustre trading environment which continues to promote USD selling. Asian equity markets were higher across the board with Shanghai leading the charge up 2.31%. In addition, yields firmed and commodities rallied as investors concerns over a double dip or potentially a meltdown subsided. However, currently risk appetite seems shaky and temperamental, with safe-haven trades such as JPY & CHF failing to surrender meaningful ground. On this hot, data de-void summer Friday we would be looking to fade risk correlated trades especially the closer we get to the European close. The big news yesterday was the US treasury Department stopped short of labeling any country (ie China) as a currency manipulator. The move was highly anticipated but well received when the report actually hit the street as the benign language should help ease trade tensions further. The report also noted that the recent decision by Chinese officials to halt the CNY peg was a positive development but would monitor closely the pace of appreciation and hinted that the Treasury still believes the CNY is seriously overvalued. Today China's car sales slowed to a 14 month low but still printed a very respectable 19.4% y/y. Given this figure and other robust economic indicators we suspect the markets are undervaluing the rate of appreciation in the CNY against the USD. We will be watching commodity currencies particularly the AUD as the inter-dependant rally in commodities & China should support further appreciation.

Yesterdays ECB meeting provided very little new information as it was universally expected they would hold rates steady. However, Trichet sounded surprisingly optimistic about the EU economy and believed the market had an overarching tendency to be excessively negative on the domestic situation in the eurozone. More importantly, Trichet failed to discuss the critical bank stress test other then he believes the report was important and action will have to be taken where needed after the tests.

In the UK the BoE MPC overlooked the elevated CPI reading and left policy rate unchanged. We suspect that inflation will continue to be a problem for the BoE and the previous MPC split vote is a clear indication of the growing concern within the central bank. While the sterling has received a boost from its recently adjusted rate path we suspect that given the UK's weak fiscal position, a move higher in rates will be sterling negative in the mid term.

As stated earlier we would be inclined to sell into any risk rally given the tentative nature of buyers and growing concern over Japan's Upper House elections over the weekend. Should the ruling government lose the fiscal discipline, which has allowed the country to run massive debt-to-GDP ratio, could be in jeopardy. Giving the transitory nature of the current sovereign debt crisis we wouldn't rule out Japan coming under heavy scrutiny. Might be a good time to consider selling JPY. Forex-Chart