Key Points
Poor Japanese numbers underline the case against the JPY.
Corrective tone helping the USD.
High-yielders such as the NZD and the AUD should eventually restrengthen, but corrective risk is currently in place.
Swiss KoF, US GDP, employment cost index and Michigan sentiment feature today.

Market Outlook
A poor set of economic numbers out of Japan overnight and this will raise the threat of more JPY weakness in the shortterm. Key CPI measures (excluding fresh foods and excluding food and energy) both came in weaker than expected (see Diary box) while consumer spending also fell back from last month. The latter is still well off the lows of last year, but it can hardly be described as strong. The developments in CPI are worrying and will raise doubts over whether key y/y rates will bounce back in the short-term. The BoJ is putting a brave face on it by declaring, after today's meeting, that the economy was still on track to deliver expansion and a normalisation in prices. They forecast core CPI (ex-fresh foods) at 0.1% for the year ending Mar 08 and 0.5% for the year ending Mar 09. However, ultimately this is not a suitable backdrop for the building of rate hike expectations and in such an environment the JPY will remain extremely vulnerable. More broad based JPY weakness looks likely over the coming week or so.

With the exception of the JPY, some corrective pressure has developed over the past couple of days, although this is mainly related to an adjustment in short USD positioning. The lack of momentum to take out the old highs on EUR-USD has led to some trimming of positioning and more of this may be required in the short-term. 1.3585 is the immediate support level of interest on EUR-USD and any move below there would leave risk down to 1.3540 ahead of the main short-term support area at 1.3460-1.3500. 1.9820 is feasible on cable. The tone of today's US GDP data will carry significance as to how far this correction can develop.

Another sign of the corrective pressure currently in place is in the fact that both the AUD and NZD have slipped further overnight against the USD - unusual when the low-yielding JPY suffers from bad economic news. This too could extend further in the short-term, although strength should eventually return given that high-yielding positives remain in place. 0.8150 is possible on the AUD, with NZD having risk to 0.7250.

Day Ahead
Switzerland - the latest KoF indicator is out and this has been improving over the past couple of months, bringing an end to the mini-downtrend seen from June 2006 to January 2007. However, a strong number will be needed to boost the CHF.

US - the first estimate of Q1 GDP, the Q1 employment cost index and the final Michigan sentiment number for April are due. The market is looking for another subdued reading on GDP of 1.8% (on an q/q annualised basis) with weakness in investment expenditure (especially residential) likely to be the main factor once again. Residential investment has taken 1.2% off the GDP growth rate in each of the past two quarters. Q1 employment costs will be watched closely for evidence of inflation pressure in the labour market. A 1% q/q rise in Q3 caused some concern at the time, but was not built upon in Q4, with the q/q rate falling back to 0.8%. The mid-month estimate for Michigan sentiment was down from March and the market will be keen to see whether this has extended any further.

Diary
Data/event BST Consensus*
 
IT Business confidence (Apr) 08.30 94.5
SE Retail sales (Mar) m/m 08.30 0.8%
CH KOF indicator (Apr) 10.30 2.00
US GDP (Q1, 1st est) saar 13.30 1.8%
US Core PCE prices (Q1, 1st est) saar 13.30 1.8% last
US Employment cost index (Q1) q/q 13.30 0.9%
US Michigan sentiment (Apr, fin) 15.00 85.0
Latest data Actual Consensus*
FR Unemployment rate (Mar) 8.3% 8.4%
FR ILO job seekers (Mar) m/m -34k -19k
JP CPI Tokyo ex-fresh food (Apr) y/y 0.0% 0.0%
JP CPI Nat ex-fresh food (Mar) y/y -0.3% -0.2%
JP CPI Nat ex-food & energy (Mar) y/y -0.4% -0.3% last
JP Unemployment rate (Mar) 4.0% 4.0%
JP Job-to-applicants ratio (Mar) 1.03 1.05
JP Overall PCE (Mar) m/m -0.8% 0.2% last
JP Overall PCE (Mar) y/y 0.1% 0.7%
JP Retail sales (Mar) y/y -0.7% -0.4%
JP Ind prod (Mar, prel) m/m -0.6% 1.0%
JP BoJ policy outcome unch unch
JP Housing starts (Mar) y/y 5.5% -0.9%
FR Consumer confidence (Apr) -20 -21
* Consensus unless stated