Risk appetite has been cautiously creeping back into FX markets at the start of this trading week. While a one day doesn't make a trend, the broader environment is shaping up to support a sustained rally in risk sentiment. First of all, the passing of the new austerity measures by the Greek congress on Friday was a step in the right direction. While unions immediately called for a general strike for Thursday, we anticipate protests will be orderly and won-t spillover into larger social disruption, prompting Greece's deficit trimming to stay on course. In addition, the Greek PM has been visiting Germany and France over the past few days drumming up, if nothing less then, strong political support and starting earnest discussions over a European version of the IMF (both positives). According to IMM data it looks as if pressure has been easing off the EUR as extreme short positions have begun to unwind and the extraordinary bearish sentiment fizzles out (balanced media coverage). In China, Governor Zhou of the PBoC made comments which hint to greater flexibility in the USDCNY. His key points were that the implicit peg to the USD since July 2008 was part of a special response to the global financial crisis. A return to the managed float exchange rate regime started in July 2005 would come and that any exit form the special situation would be managed prudently, since the global environment was still very precarious. China will release a slew of economic data this week, which should point to strong growth (good for risky cyclical currencies) and reacceleration in inflation. The EURCHF has been trading in a conspicuous pattern for the last few weeks (since last intervention), balancing on the 1.4620 SNB defined line in the sand. In recent weeks Switzerland's economic data has been surprisingly positive with both growth signaling a strong recovery and inflation increasing at a healthy pace. While we are not expecting any shift in monetary policy on Thursday rate decisions, we could see a softening on policy commitments regarding the CHF. While the chance of the SNB completely removing the threat of FX intervention is remote, there is a chance the members provide a slight more dovish tone. We suspect that the offical support for the CHF is nearing an end and even a gentle shift should send the EURCHF lower. And on a final note, we believe conditions are nearly perfect for an extended period of JPY weakness. The better than expected NFP Friday could been seen as the catalyst with daily Ichimoku cloud resistance at 90.75 providing the next hurdle. In short, the BoJ has expressed their desire to flight deflation and JGB purchases seem the likely tool, improving risk trading environment (VIX stands at 18) and G10 central banks moving forward with tightening in Q2 creating attractive yield differentials.

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