EUR/USD has sunk lower during European hours in line with the softer tone of stocks, though European indices have recovered most of their earlier losses.  Comments overnight from Chinese Premier Wen Jiabao that the global economy  faces a slow and bump recovery had heightened fears that Chinese stimulus may start to be withdrawn soon and that the pace of growth in the world's  powerhouse may be turned down.  The JPY is higher across the board.  The outlier is the AUD which has rallied despite the general paring back of risk on much better than expected domestic jobs data (+24.5K jobs vs median of -10.0K).  Having reached a high of AUD/USD 0.9370, the AUD has drifted lower to 0.9310.

The issue of currency flexibility has been thrown back into the headlines this morning ahead of President Obama's visit to Asia this week and by the appearance of US Treasury Secretary Geithner at this morning's APEC forum.  Unsurprisingly Geithner took the opportunity to reiterate the US Treasury's commitment to strong USD policy, of more note is that he also stressed the importance of countries following market related currency policies.  Not only is China's present policy of keeping the value of the renminbi artificially low being associated with a built up of imbalances visible in its own huge fx reserves but, concerns are mounting that pegging exchange rates to the weak USD is leading to asset price bubbles in some Asian countries specially in China, Hong-Kong and Singapore.  China cannot rush the transition to a fully convertible exchange rate for fear of undermining its own banking system but the pressure to take steps towards this goal is mounting.  An appreciation in the CNY will relieve pressure on the real effective exchanges rates of Japan and the Eurozone which are presently bearing the brunt of the USD's downward adjustment.  It is feasible then that any move towards flexible exchange rate regimes in Asia will lessen the jaw boning from Eurozone officials over the value of EUR/USD and allow for further appreciation in this cross rate. 

The APEC meetings aside, there was little to focus on during the European session morning.  The tone of the ECB's November monthly report was very much in line with ECB President Trichet's presentation following last week's policy meeting.  The notion of deflation was dismissed by the observation that inflation will turn positive again in the coming months and medium/longer term inflation expectations remain anchored.  That said there was nothing in the report to disregard the perception that ECB rates will be on hold for many months yet.  Eurozone industrial production data at +0.3% m/m in Sep was moderately weaker than expected but followed an upward revision to Aug figures.  Overall, this data supports the view that Eurozone Q3 GHDP data due tomorrow will confirm a decent recovery (median +0.5% q/q).  This data is likely to enhance the upward pressure on EUR/GBP given that the UK continued to languish in recession during Q3.  An attempt by GBP to recover some of yesterday's post Inflation Report losses stalled above EUR/GBP0.9010.  Cable was dragged lower by the better USD. 

This afternoon, US initial claims and the monthly budget statement are due.