Key Points
USD stabilises ahead of key economic releases.
This week's ISM surveys & employment report will be significant for sentiment about Fed policy.
The USD and the high-yield versus low-yield debate will also be affected by the data.
Tankan moderately disappointing but market impact limited.
AUD helped by strong retail sales data.
US ISM, UK and Eurozone PMIs feature today.

Market Outlook
The USD is finding its feet after Friday's announcement by the US regarding the imposition of tariffs on imports of coated paper from China. Key to the ongoing market reaction will be how things subsequently develop. Is the move the first of several in a wide-scale attack by the US and/or will China respond by retaliating? News of heightened protectionism will be negative for investor confidence in the USD.

However, this week is primarily about the US economic data, with the ISMs for manufacturing and non-manufacturing and the employment report all due. Collectively, this set of data will have a significant bearing on sentiment about the state of the US economy and the prospects for Fed policy in the months ahead. The USD will be sensitive to anything definitive in this regard, but other FX themes will also be affected. For example, any indications of resilience in the data will be helpful for equity markets and high-yielding over low-yielding currencies, while very negative data would hurt global market sentiment and undermine risk appetites. Weak US data will be needed to ensure further advances in EUR-USD.

The Tankan survey was slightly weaker than expected, although not by sufficient magnitude to disrupt BoJ policy expectations. As one can see from the chart, the levels of the major indices remain at levels that compare favourably with the experience since the early 1990s.

A strong set of retail sales and building approvals data out of Australia has pushed the AUD to new highs for this move with the market becoming more apprehensive about the risk of a rate hike at this week's RBA meeting. For choice the RBA will most likely prefer to wait until they have seen the Q1 CPI data released later this month, although a number of indicators suggest that the policy tightening pursued thus far has not had major impact, so a further immediate rate hike could easily be rationalised. The AUD looks set to advance further ahead of the decision on Tuesday night and as a high-yielder AUD sentiment will also be affected by the interplay between global markets and today's US ISM data.

Day Ahead
Eurozone - PMI manufacturing numbers for a variety of Eurozone countries should continue to paint a picture of solid activity and in this regard are likely to support the recent modest firming in ECB rate expectations. The market seems to be gradually coming round to the view, with which we would agree, that the next move to 4% will not be the last.

UK - PMI numbers in the UK are more interesting given the current fluidity of the MPC policy debate. Recent manufacturing surveys (PMI and especially the CBI) have been more upbeat over the past couple of months, while the market (and the MPC) will also be strongly focused on the price components of this survey. The UK PMI survey gives a measure for output prices as well as input prices and the former stood at 56.9 last month, the highest since the series began in November 1999. The CBI's measure of output price expectations also stands at a 12- year high and the MPC is currently sensitive to how manufacturing prices develop in the short-term as they are a potential lead indicator for some elements of core CPI. EURGBP currently has support at 0.6750-75.

US - markets will be highly sensitive to anything away from expectations on today's ISM for manufacturing. Recent news like last week's durable orders data has helped to convey negative signals about the manufacturing sector, but Friday's Chicago PMI, not always the best of indicators, was a much stronger than expected 61.7. Last month's NY and Philly Fed surveys were both subdued.

Diary
Data/event BST Consensus*
 
CH PMI manu (Mar) 08.30 63.6
IT PMI manu (Mar) 08.45 54.0
FR PMI manu (Mar) 08.50 54.0
DE PMI manu (Mar) 08.55 57.5
EU PMI manu (Mar) 09.00 55.7
GB PMI manu (Mar) 09.30 55.1
GB Mortgage equity withdrawal (Q4) 09.30 ?11.8bn last
US ISM manu (Mar) 15.00 51.0
US Fed's Poole on understanding inflation 18.00
JP Monetary base (Mar) y/y 00.50 -19.7%
AU Trade balance (Feb) 02.30 -A$1.1bn
Latest data Actual Consensus*
JP Tankan - large manu (Q1) 23 24
JP Tankan - large manu outlook 20 22
JP Tankan - large non-manu (Q1) 22 23
JP Tankan - large non-manu outlook 23 22
JP Capex plans (Q1) 2.9% 1.7%
AU Retail trade (Feb) m/m 0.9% 0.4%
AU Building approvals (Feb) m/m 10.6% 0.2%
SE PMI manu (Mar) 60.6 62.5
TR GDP (Q4) y/y 5.2% 4.2%