Key Points
JPY remains strong overnight.
Global equity markets will hold the key to FX movement today via 'risk appetite' implications.
GBP continues to carry a risk premium of its own.
UK average earnings, US current account data due today.

Market Outlook
The JPY has strengthened overnight and this could have further to run today with equity markets set to weaken, at least initially. USD-JPY looks set to test the 115.16 low seen on March 5 and the big issue is whether the Dec low of 114.45 can remain intact. The extent of any further JPY gains will be linked to what happens in global markets. Weakness in high-risk assets like equities and emerging markets will mean further upward pressure on low-yielding currencies like the JPY and CHF, while the reverse will apply on any recovery in equities. Such an environment is clearly a recipe for JPY volatility and this looks set to continue for a few weeks yet. The key issue is whether the moves become protracted, for example, by breaking the kind of levels mentioned above.

The market doesn't really know what to make of EUR-USD at the present time. With much of yesterday's angst emanating from concerns about the sub-prime mortgage market in the US, there is the inevitable suspicion that EUR-USD should rise. However, there are two reasons why this should not necessarily be the case. First of all, the market is already long of EUR-USD according to IMM positioning and such positions could easily be liquidated in an environment where risk appetites in general are being reined in. Second, if money is taken out of markets globally, much of it will flow back in to the USD investor base and this will be USD supportive. On this reasoning, there is some degree of downside risk for EUR-USD.

Yesterday's retail sales numbers out of the US were disappointing, but it would be wrong to rush into any conclusions about what this means for the consumer spending outlook. February was the coldest since 1979 and coming after a mild January, it is perhaps not surprising that the adjusted m/m change was depressed somewhat. Indeed, it is not all gloom and doom in the US. Last night's reading for the weekly consumer sentiment number was the highest since Oct 2001.

GBP continues to be at the forefront of any JPY movement and as noted yesterday, GBP will retain a risk premium in the eyes of most market participants because of this scope for volatility. UK average earnings data is due today and while a strong number would support GBP initially, it is unlikely to be enough to turnaround underlying sentiment or indeed the main factors driving GBP at the current time (i.e. global market sentiment and the JPY). EUR-GBP has risk up to 0.6890, while the big level on cable is at 1.9185.

Day Ahead
UK - labour market data is due and the main focus will be on the average earnings numbers. Average earnings have been well contained in recent months, although the latest data is for January, so should pick up some of the higher pay settlements reported for the current wage round. Anecdotal evidence on the latest wage round has been mixed, with early New Year scare stories about very strong rises having been toned down a little over the past month or so. January data could also be affected by bonus payments, so in terms of information about pure pay settlements, it will be best to look at the ex-bonus number.

US - Q4 current account data is due and the market will initially be sensitive to any unusual headline numbers, although with the monthly trade deficit numbers having narrowed over the past six months or so, some of the sting has been taken out of the long-standing concerns about the US trade imbalance.

Diary
Data/event BST Consensus*
 
GB Claimant count (Feb) 09.30 -8k
GB ILO unemp 3m ave (Jan) m/m 09.30 -23k last
GB LFS employm'nt 3m ave (Jan) m/m 09.30 51k last
GB Average earnings (Jan) 3m y/y 09.30 4.0%
GB Earnings ex-bonuses (Jan) 3m y/y 09.30 3.8%
CH ZEW expectations (Mar) 10.00 -17.3 last
US Mortgage apps - purchases w/w 11.00 1.0% last
US Current account (Q4) 12.30 -$203.5bn
US Import prices (Feb, nsa) y/y 12.30 1.4%
US Imp prices ex-petrol (Feb, nsa) y/y 12.30 1.6% last
CA Capacity utilisation (Q4) 12.30 83.5%
AU Employment (Feb) 00.30 15k
AU Unemployment rate (Feb) 00.30 4.5% last
Latest data Actual Consensus*
US ABC consumer conf (w/e Mar 11) 2 -1 last
AU Consumer sentiment (Mar) 3.7% 1.7% last
JP Ind prod (Jan, final) m/m -1.7% -1.5%
FR CPI (Feb, prel) y/y 1.0% 1.3%