FX markets continue to languish with low volumes and less than convincing directional moves. The story today has been the stellar performance of both US & Asian equity markets which should give risky assets a temporary respite from selling. FX volatilities and the VIX together have dropped off which signifies a reduction in market disturbance. Overall we doubt there has been any real shift in risk appetite, so it'll remain prudent to sell into rallies. We believe that the European debt crisis will remain the core driver and expect the EUR to downtrend - especially against the USD and JPY. Just to note, 10 yr bond spreads between Spanish/German and Italian/German have both peaked at 10 year highs, illustrating the market's desire to punish any countries with loose fiscal policy.

The JPY took a hit as the FX market has been pricing in the selection of Yen Perma-Bear Finance Minister Kan. Most suspect that the anti-deflation & economic growth policy of Kan will lead to a weaker JPY. We agree but at this point the Kan nomination has been fully priced in and traders should look for concrete action to contribute to any further JPY deprecation.

In Australia, trade balance for April was well above expectations, flipping to the positive side of A$0.13 bn after March's deficit of -A$2.04 bn. Exports led the way hitting 10.7% y/y, as firm commodity prices more than negated the effect of a stronger AUD. While in New Zealand, S&P confirmed the nation's AA+ sovereign rating and stated the outlook for the nation's credit rating remained stable. The analyst went on to add the implications for New Zealand due to the sovereign debt problems in Europe are fairly muted. Finally some good sovereign credit news.

Economic data out of the US continues to support the theory that recovery is progressing nicely even though the pending home sales index jump in April needs to be taken with a grain of salt. ADP numbers today will set the stage for what could be a whopper of a NFP on Friday (ISM non-manufacturing survey will take a back seat). The (pre-ADP) market is expecting NFP at 575k and unemployment at 9.8%. Even when you carve out the consensus, the figure will still be impressive and should be USD positive. There is still considerable debate whether positive US data will support the USD or risk appetite (which would cause USD selling).

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