JPY

There is a solid correlation between USD/JPY and US stock indices. This reflects nothing more that the sensitivity of the yen to risk appetite. There are a number of other factors at play currently that are suggestive of further yen losses; not least the easy policy of the BoJ.

The outcome of tomorrow's BoJ policy meeting should be watched but for sure the BoJ is poles apart from other major central banks in its policy position at present. As long as risk appetite holds the yen looks set to keep pushing lower.

Given the risk that Trichet may hint tomorrow that ECB rate hike speculation is overdone USD/JPY, AUD/JPY and CAD/JPY may be the better performers over the next week or so.

EUR/GBP: BoE and ECB meetings in view

Sterling reacted positively yesterday to the better than expected UK services PMI data. The better data were encouraging but the view that these data will trigger a BoE rate hike in the spring or early summer is questionable.

Firstly, firms reported that there was a beneficial impact from an increase in public spending in March. Clearly this will not last. Today marks the start of the new tax year and with it comes the brunt of the government's austerity measures. Consumer confidence is already at a very low ebb on the back of the January VAT hike and higher food and energy prices.

It is difficult to expect much improvement in the current environment. Not surprisingly negative sentiments have been echoed by retailers; the Feb retail sales data produced a negative surprise. It seems reasonable to expect that the majority of the MPC will want to see the impact of the April austerity before making a decision on policy.

Our central view is that the BoE will not hike rates until Nov 2011. Given that the market is priced for a summer rate hike, sterling is still vulnerable vs. the EUR on a 1 to 3 mth view if the market does pare back rate hike expectations.

That said we see risk that tomorrow the ECB could signal that they may not hike rates as aggressively as the market is prepared for this year. This would likely take some of the wind out of the EUR's sails and could limit near-term upside in EUR/GBP.

Sweden

The SEK rallied yesterday on comment from the PM that the Swedish economy could cope with the strength of the currency. The PM, however, does not set monetary policy and the Riksbank takes a more balanced view on the impact of currency strength.

In a speech earlier this week Deputy Governor Ekholm warned that "a further appreciation of the krona would risk impaired target fulfilment and in February this justified a lower repo rate path than was decided upon". Her comments follow the recent softer than expected retail sales and PMI data. That said, PMI at 58.6 still reflects a solid expansion and housing sector data continue to show the potential for excess demand.

This suggests that Riksbank rates are still set to be pushed higher this year, albeit perhaps at a more moderate pace than had been anticipated. Having undergone a decent correction since early March the SEK is likely to be sensitive to better news on the economy. Service sector and industrial production data are due later in the week. We see scope for EUR/SEK to push back below 8.80 on a 3 mth view.

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