--> Author: Ashley Davies Morning Adviser Asia

? USD: G7 fx statement unchanged? EUR: Ifo due? JPY: commended? IMM: liquidation of high yielders

USD

G7 fx statement unchanged: The G7 meeting over the weekend was a non-event for the currency markets, with the G7 leaving the currency section of the communiqu? unchanged from the February meeting in Boca Raton. European representatives, who pushed for inclusion of an excessive volatility warning at the last meeting, are clearly relieved that the USD has bounced, but are likely still wary that structurally driven USD weakness could resume at any time. The US administration clearly wants to keep the pressure on Asia governments to allow more currency flexibility and doesn't want to encourage the perception that it prefers to see a stronger USD, while the Japanese MOF have already amply demonstrated that the existing language does not prevent them from intervening if they feel it is necessary. Economic data continued to surprise on the upside on Friday with durable good orders for March rising by 3.4% m/m versus expectations of 0.7% m/m. Our US data index which captures how much indicators are deviating from expectations is now running at extreme highs, suggesting that the current levels of the USD contains a lot of good information already priced in. We entered a long EURUSD trade position at 1.1840 on Friday, with a stop-loss at 1.1725 and a target of 1.2050. The rationale for the trade is that with so much good news priced in, the USD is vulnerable to negative information and we expect EURUSD to move slightly higher to reflect this. US data out today includes new home sales at 14:00 GMT which likely remained strong, based on the strength of the mortgage applications index. However, the main focus of the week is Q1 GDP on Thursday and the markets are expecting a rise of 5% annualised. Inflation also likely accelerated according to the closely watched personal consumption expenditure price index.

JPY Commended: Japan was quite happy with the outcome of the G7 meeting with no discussion on fx and by implication no direct criticism of Japan's policy of intervention. Instead Japan was commended by US Treasury-Secretary John Snow for its economic recovery. BOJ Governor Fukui told the G7 Finance Ministers that he is committed to maintaining loose monetary policy. However, our economists don't expect the BOJ to loosen monetary policy any further at the upcoming board meeting on Wednesday. Of greater interest will be the BOJ's semi-annual economic forecasts which will be released following the meeting. Despite the recent improvement in the economy, the BOJ will likely forecast continuing deflation over the remainder of this fiscal year, which should underpin expectations of continued easy monetary policy. USDJPY clearly rejected the 110 levels last week, and optimism over the Japanese economy combined with a weakness in the USD this week should help to drive USDJPY lower and we target 105 over a 1 to 3 month time horizon. Industrial production for March is due on Wednesday and likely grew by a healthy 0.7% m/m. However, more domestic oriented data including CPI, household spending and labour force data will be due out later in the week on Friday.

EUR Still the same: In an interview in Friday's FT, ECB President Trichet emphasized that policy is on hold, noting risks to price stability are balanced and the bank is keeping all its options open. He emphasized the importance of a recovery of domestic consumption, while ECB President Issing also echoed this idea in a speech on Friday, making the relatively unorthodox statement that consumer confidence would be key in a Euroland economic recovery. The remarks suggests the ECB is sensitive to the importance of domestic consumption stepping up to offset a likely decline in external demand towards the end of the year, and supports our view that Euroland rates are likely to fall in Q4, in the context of a much stronger Euro. For now though, the ECB is on hold, which keeps the evolution of Fed expectations the main driver of the relative interest outlook. The German IFO survey for April is due out later today at 08:00 GMT and is expected to show some improvement in sentiment after dipping in February.

CHF

Hildebrand speaks: SNB board member Hildebrand spoke on Friday and did little to support the view that rates in Switzerland are poised to rise. In fact, he stressed the benefits of low rates and the need not to raise rates too quickly. His speech mostly avoided monetary policy, however, and scheduled remarks on Monday on the economic outlook may be of more importance. Still, the chances of an early SNB tightening in June have receded and EuroSfr futures have continued to tick higher in price. In the short-run, we take a relatively neutral view on EURCHF (our 1m target remains at 1.5500). But recent economic numbers in Switzerland point to a further narrowing of the EUR-CHF interest rate differentials at some stage, a negative for EURCHF. We are sticking to our 3-month target of 1.5400.

CNY Diversification: SAFE was in the FT again on Friday with a story that the Chinese authorities are thinking about further diversifying their FX assets into Asian and European currencies. Guo Shuqing, head of SAFE, said that USD-denominated assets would continue to form the lions chare of China's FX reserves, but a consideration should be given to positions in the other currencies in which SAFE is active - EUR, GBP, AUD, JPY, CAD. China is expecting the pace of reserve accumulation to slow in the course of this year as inflows temper and the trade accounts are expected to post an annual deficit. This is a key development for major pairs and announcements should be watched keenly, especially for diversification into major trading partners assets - especially EUR and JPY.

GBP Mixed news: Q1 GDP rose by 0.6% q/q, weaker than the +0.7% consensus and well below the +0.9% rise recorded in Q4, the first deceleration in a year. In contrast, March retail sales were firm, up 0.6% on the month vs. a +0.2% consensus. Our UK economics team continues to think the balance of data in recent weeks supports a 25 bp hike from the MPC in May, but it is a much closer than the market had initially anticipated. Short sterling futures are little changed on Friday's session and continue to price 3-month rates at 4.5% in June, 50 bp above the current base rate and 11 bp above the current 3m rate and the GBP will presumably be vulnerable if the MPC fails to move in May. We remain long GBPAUD as a strategy trade recommendation on the view that sterling is likely to outperform in an environment of pressure on carry trades given our MPC view, but clearly the trade would be vulnerable in the event of a MPC disappointment.

IMM Liquidation of high yielders: IMM data shows further liquidation of high yielder positions in the week ended Tues. April 20. The net spec position in AUD was cut in half, to 12k contracts from 24 the prior week, while GBP spec positioning fell to 10k from 20k and is now the least long it has been since last September. CAD positions were also slashed, back to 11k from 34k the prior week. In contrast, net positioning in EUR actually increased to 14k from 13k while net CHF positioning was a bit shorter, moving from 10k net short to 18k net short. JPY positioning pulled back to 11k from 48k net long. Our measure of overall USD spec positioning across all major currency contracts was the least short USD it has been since mid-March.

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