The return of European traders to their desks following a 4-day holiday weekend was an unpleasant one, as equities sold off sharply throughout the Europe, extending a sense of risk aversion started in Asia and then continued in the US. Concerns continue to build around the deteriorating situation in Europe - mainly as a result of Spain's and Italy's rising yields - as well as last Friday's non-farm payroll report which adds to concerns that the US economic momentum is slowing. With no offer of easing from Fed Chairman Bernanke in a speech yesterday we are seeing a correction in equities playing out that should favor the JPY and USD.

Let's have a quick tour of key equity markets:

German DAX30 - Testing March Lows

The German DAX 30 extended its losses from last week pushing further below the 55 day EMA (in blue). It now tests March lows in the break he would open up further downside risk.

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UK FTSE100 - Breaks 200-Daily EMA, At 50% of Dec-Mar Rally

The FTSE100, in today's session hit its lowest level since the start of the year cracking its 200 daily EMA as well as an upward sloping support trendline. Now its at a 50% retracement of the upswing since late December, and it too could see further pullback if risk sentiment continues to be poor.

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US S&P500 -Breaches 50-Day EMA, Throwback Accelerating

The S&P 500, which started its pullback later than European equities push through its 50 day EMA and now targets the 1338.50 level, our lows from March. again unless we have an inclination by the fed officials of more stimulus, or stupidly improved economic data this correction can gather pace.

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We talked about this last week: USD - Expecting Stronger Dollar As Equities Set to Pull Back From 2Q Rally

Copper - Breaks Recent Range to Downside

Finally looking at copper prices we see an important breach of its support from February and March, and a break of the 200 daily EMA. copper - being an industrial metal - is a leading indicator for global Outlook and if it's falling that expectations for global growth are falling as well. That sets up a tough environment for sentiment.

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In the Currency Space, JPY Can Benefit from Carry Trade Unwind

We had previewed the possibility that the Japanese yen could strengthen further if we had further risk aversion and a correction equities last week.

AUD/JPY - Where to Next for Yen Depends on April BOJ Meeting

The key catalyst for the Japanese yen to be able to take advantage would have been the Bank of Japan not undertaking further stimulus measures in its meeting earlier this week. Having failed to do so we see Japanese yen crosses falling as we have unwinding of carry trade positions.

Those are positions where traders borrow in low yielding yen and purchase higher-yielding commodity currencies like the AUD, NZD, CAD, EUR, and GBP. Last week I had targeted the Australian dollar because of its week fundamentals but we see a pullback in carry trade across-the-board.

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Above we see the Japanese yen rolling over against the dollar, euro, and pound. Since there had been a very strong rally throughout February and the first half of March there still remains further scope for that yen to strengthen in the coming weeks.

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Here we have the yen against the Canadian, Australian, and New Zealand dollars and we see the very strong bearish candles for today's session as risk aversion picks up. That is an indication that this trend we've seen in late March and in early April has staying power, with the key fundamental impediment - the BOJ decision - out-of-the-way.

The unwinding of carry trade happens quite quickly. For all six of these JPY crosses our target could be reversion to the mean which for us would be the 200 daily EMA. That leaves a bit more scope for further downside in the USD/JPY, GBP/JPY, NZD/JPY, and CAD/JPY as the EUR/JPY and AUD/JPY have been leading the way down and have already reached the 200-daily EMAs.

The question is will there be much of a pullback, and whether equity markets are able to stabilize at all this week. Depending on the catalyst that causes them to do so, I would be looking at opportunities to sell any short term rallies in these JPY crosses.