Key Points
EUR-USD remains close to highs, suggesting some upside risk, but major move higher unlikely at this point.
JPY looking weak on the crosses - tonight's data will be key in determining whether this develops further in the short-term.
RBNZ raises rates by 25bp and says exchange rate strength unjustified.
BoC Monetary Policy Report, Japanese data feature.

Market Outlook
EUR-USD remains close to the highs seen yesterday and the lack of any pullback suggests some element of upside risk. However, a major break higher seems unlikely with the market already well positioned for such strength. If 1.3620 breaks, this would be the signal for a pullback. There is little of relevance on the data schedule today and US releases seen so far this week have been mixed - soft housing, a rebound in durable orders and a slightly improved Beige Book.

JPY weakness has also been a continuing feature overnight, with market sentiment in general still being driven by yield considerations. The April 16 high of 162.43 on EUR-JPY is the main level to look at today, although this should hold for now given the important Japanese releases scheduled for tonight (see below for preview). Any weakness in this data would run the risk of a break higher, but the status of EUR-USD will also be significant.

The RBNZ raised rates by a further 25bp, citing ongoing strength in housing and domestic demand and some accelerating inflation pressure in the non-tradables sector i.e. those categories that are not influenced by the exchange rate or commodity prices. They made no comment on what could happen to rates in future, leaving the market with the impression that there is no longer a tightening bias, although until the data shows signs of weakening the risk of further tightening will remain in place. Significantly, they also commented on the recent strength in the NZD, stating that 'the exchange rate is now at levels that are both exceptional by historical standards, and unjustified on the basis of mediumterm fundamentals.' The solid yield backdrop suggests the likelihood of further strength in the NZD, although a move above 0.7500 is required to establish some fresh momentum and until this happens there is a risk of some corrective activity. 0.7365- 85 is key short-term support.

Day Ahead
Canada - the BoC Monetary Policy Report is released today and is likely to reflect the slightly more hawkish view extended after Tuesday's policy announcement. At that meeting they highlighted the fact that inflation had been higher than expected in recent months, but stopped short of sending out any strong signals about the likelihood of any rate hikes in the foreseeable future. They would only say that while inflation risks were roughly balanced there was a slight 'tilt to the upside'. A similar message looks likely today. There is scope to 1.1090 on USDCAD as long as it remains below 1.1200.

Japan - a whole host of numbers are due in Japan tonight, with CPI and consumer spending likely to attract the most attention and industrial output and labour market numbers also due. The y/y rate on the CPI ex-fresh foods category eased back into negative territory last month (-0.1%) for the first time since April last year and the market is looking for further slippage to -0.2%. The BoJ are likely to continue focusing on the medium-term outlook for inflation, but how quickly the y/y rate moves back into positive territory will be a key factor for market sentiment about policy prospects. Consumer spending improved a little further last month, continuing the rebound seen in Q4 after a very weak Q3. Whether or not this is sustained in coming months will also be significant for policy sentiment. The BoJ meeting tonight is unlikely to reveal any change in policy, while their twice-yearly report on the outlook for the economy and prices is likely to reiterate the belief that CPI will recover modestly over the coming two years.

Diary
Data/event BST Consensus*
 
SE Consumer confidence (Apr) 08.30 16.7
NO Unemployment rate (Apr, nsa) 09.00 2.0%
US Initial claims (w/e Apr 21) 13.30 330k
US Continuing claims (w/e Apr 14) 13.30 2531k last
CA BoC Monetary Policy Report 15.30
FR Unemployment rate (Mar) n/a 8.4%
JP CPI Tokyo ex-fresh food (Apr) y/y 00.30 0.0%
JP CPI Nat ex-fresh food (Mar) y/y 00.30 -0.2%
JP CPI Nat ex-food & energy (Mar) y/y 00.30 -0.3% last
JP Unemployment rate (Mar) 00.30 4.0%
JP Job-to-applicants ratio (Mar) 00.30 1.05
JP Overall PCE (Mar) m/m 00.30 0.2% last
JP Overall PCE (Mar) y/y 00.30 0.8%
JP Retail sales (Mar) y/y 00.50 -0.4%
JP Ind prod (Mar, prel) m/m 00.50 1.0%
JP BoJ policy outcome unch
JP BoJ Outlook for Economic Activity and Prices 07.00
Latest data Actual Consensus*
NZ RBNZ rate announcement 25bp unch/ 25bp
NZ Trade balance (Mar) NZ$61m NZ$50m
AU New home sales (Mar) m/m 0.0% 2.9% last
JP Small business confidence (Apr) 49.6 50.4 last
DE Import prices (Mar) y/y 0.9% 0.8%
GB N'wide house prices (Apr) m/m 0.9% 0.6%
DE Consumer confidence (May) 5.5 4.7
FR Own company ind outlook (Apr) 14 16
FR Business climate indicator (Apr) 111 109.0
* Consensus unless stated