Improved manufacturing confidence data both in Japan and in China have underpinned confidence in the global recovery which has spurred on stock markets and encouraging further yen selling around the European open.  Japan's Q1 Tankan survey reported a significantly improved outlook in both the manufacturing and non manufacturing sector.  Although the survey confirms that pessimists still outnumber optimists, the improvement is in line with the strengthening in Japanese economic indicators in recent months which has already allowed the Nikkei to register gains of 6.62% year to date; one of the strongest world equity markets during the first quarter.  While continued strength of the Nikkei could dampen yen selling going forward, for now the underwinding of 'safe-haven' yen longs in favour of higher yielding assets abroad is dominating fx markets.  CAD/JPY reached 92.64 this morning before running into profit-taking, AUD/JPY pushed to 86.01.  

European PMI numbers added further weight to the hopes that the global economic recovery is gathering momentum.  Final March data for Germany, France and Italy were all revised higher, the Eurozone PMI now standing at an expansionary 56.6.  UK PMI also exceeded expectations pushing up to 57.2 in March from 56.5, while Swiss Mar PMI blew away markets estimates by rising to 65.5.  EUR/CHF dropped lower on the release of this number.  Despite continued warnings from the SNB that action will be taken to stem the pace of the appreciation of the CHF, also evidence in the rhetoric of the SNB in recent weeks has been the implication that policy tightening may be around the corner.  Following a return to economic growth in the middle of last year, Swiss M3 money supply pushed significantly higher towards the end of 2009 which likely raised the hackles of SNB hawks.  Given the outlook for the EUR remains weakened by the concerns over fiscal coherence, the downtrend in EUR/CHF is likely to have further to run.  That said, the SNB can be expected to continue trying to stem the pace of the CHDF's appreciation and given thinned holiday conditions, the next few sessions may offer an attractive opportunity for the SNB to stretch the value of its intervention fund.  

The IMF warned overnight that the NZD may be over-valued by 10%-25%.  Unsurprisingly NZD/USD fell on the news to an intraday low of 0.7036.  The IMF comments reflect the fact that the NZD is often dragged higher by gains in the AUD, even though the composition of the Australian and NZ economies is very different.  Higher unemployment levels in NZ and expectations of slower economic growth in NZ relative to Australia this year mean that last year's gains in the NZD was a largely unwelcome development.  That said, the RBNZ has indicated that it expects to start removing policy stimulus around the middle of 2010 and this is likely to keep the NZD reasonable well bid vs other non-'commodity currencies'.   

The release this afternoon of the US Mar ISM manufacturing will provide a temporary diversion from speculation surrounding tomorrow's key payrolls data.  Initial claims data are also due.

Jane Foley
Research Director