Key Points
JPY receives small fillip from S&P upgrade.
Markets well positioned for current news backdrop.
US and Japanese data feature this week.
Australian inflation data in focus today.

Market Outlook
S&P raised Japan's foreign and local currency ratings to AA from AA-, citing some modest improvements on price stability, structural reform and the outlook for fiscal problems. The news initially triggered a very modest reaction in the FX market, although the JPY did strengthen later in the Asian session.

The broad situation in the FX market looks like being quite similar to last week. In terms of high yield versus low yield and overall USD bearishness, little has changed, but with the market already well positioned for this scenario, further progress could be slow and there would be a risk of corrective activity if any news were to appear that threatens the consensus. Key factors this week include Friday's CPI & consumer spending data in Japan and housing, durables and GDP data in the US.

Latest IMM positioning data shows that as of last Tuesday net spec EUR-USD longs advanced a little further to a new record high of 106,770 contracts from 104,394 the previous week. Net USD-JPY longs widened to 70,519 contracts from 64,841, although this remains well below the highs of January when it reached 173,005. The EUR positioning represents a constraint on EUR-USD upside and would also explain why current progress remains very slow. However, a change in news flow (i.e. back in the USD's favour) is perhaps needed to nullify current upside and the likelihood of some liquidation pressure. The JPY positioning is no constraint to USD-JPY upside, but here too some USD positive news flow is required to encourage upward movement.

Day Ahead
UK - money and mortgage lending is due this morning. There has been some evidence of a slowing in mortgage approvals in Q1 from the high levels seen in Q4, so a slightly softer mortgage lending profile should appear subsequently, but at this stage it is unlikely to be significant enough to alter current expectations in the UK money market. Cable is consolidating after the initial push seen last week and this could see it revisiting the 1.9900-40 area at some point today. However, GBP is likely to remain in favour ahead of next month's MPC meeting & Inflation Report, so more upside looks likely overall.

Australia - Q1 CPI is due tonight and a weak number will be required to neutralise the threat of a rate hike in May. The RBA is primarily focused on the medium-term outlook for inflation rather than what is happening presently and that longer view is being supported by strength in spending, credit growth and the labour market. However, weaker than expected PPI output today, which hurt the AUD, is one piece of evidence suggesting a lack of follow through inflation pressure. We still like the AUD overall, but there would be some additional corrective risk if 0.8340 breaks, suggesting the possibility of having better levels to buy in at. 0.8280 is support below 0.8340.

Diary
Data/event BST Consensus*
 
GB M4 (Mar) y/y 09.30 12.5%
GB M4 lending (Mar) y/y 09.30 14.4% last
GB BBA mortgage lending (Mar) 09.30 ?5.2bn last
JP CSPI (Mar) y/y 00.50 0.2%
AU CPI (Q1) q/q 02.30 0.6%
AU CPI (Q1) y/y 02.30 3.0%
AU CPI mkt prices ex-volatile (Q1) y/y 02.30 2.6%
AU CPI-RBA trimmed-mean (Q1) y/y 02.30 2.8%
Latest data Actual Consensus*
AU PPI output (Q1) q/q 0.0% 0.6%
AU PPI output (Q1) y/y 2.8% 3.5%
* Consensus unless stated