§         Australia Q2 Westpac Industrial Trends Survey dropped 2.1 points vs. Q1 to 53.9.

§         Japan Apr. All Industry Activity Index out at 0.8% vs. 0.4% expected

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Key Risk Events (All times in GMT)

§         Switzerland May Trade Balance (0615)

§         Switzerland SNB 3-month Libor Target Rate (0730)

§         UK May Retail Sales (0830)

§         Canada May CPI (1100)

§         US Weekly Initial Jobless Claims (1230)

§         US Jun. Philadelphia Fed Survey (1400)

§         US May Leading Indicators (1400)

§         US Treasury Secretary Paulson to speak on US Economy, Housing (1645)

§         US Fed's Kohn to speak (1830)

§         UK BoE's Gieve to speak (1900)

The USD tended to the weak side and was weaker still overnight as it seems that risk aversion is rubbing the greenback the wrong way. This was one of our key worries when we discussed the prospects for a sustained USD recovery, as it seems that the USD, at least for now, seems negatively correlated with risk appetite. We're not sure that this is justified in the long run, but it is the market preference for now and the USD weakened further back into its old range late yesterday and overnight and appears moribund for now as we await the next catalyst. Also, the oil market rallied again after a test of support and we're not sure which market is the cart and which is the horse in the USD-oil equation at the moment.

GBPUSD survived another go at the lower end of the range yesterday, though GBP looks relatively weak if we glance at the EURGBP and GBPCHF charts. Today's UK Retail Sales could be the catalyst that decides whether EURGBP heads through 0.7950 resistance for another test of the 0.8000 area, with 0.8030 the key resistance that has held since late April. King overnight reiterated negative comments on the economy. What a contrast to Bernanke's words: King said that "we believe that a slowdown in the economy is necessary to dampen price and wage pressures". And although King said that policy makers are "prepared to take whatever action is needed" (to anchor CPI), he also said that growth is likely to remain subdued for the rest of the year and that he sees take home pay rising less than productivity for the year. Considering the bank's very negative view on the economy, this is net bearish for GBP, though this has yet to be fully proven on the charts.

Once again in the risk aversion department: We are really experiencing a remarkable divergence in a correlation that has otherwise held very well for several years now: namely, the positive correlation between the likes of EURJPY and other JPY crosses and equity markets. The best explanation we can find for this is that we can also see a strong negative correlation between EURJPY and German 2-year rates over the last few years. What has changed is this: previously, equity market rallies were associated with bond market sell-offs and vice versa. Now, with inflation worries predominating, the rising yields are pummeling stocks. So it appears the stronger of the correlations for now for JPY is in the interest rate department. The market sells the JPY, one supposes, as inflation worries makes Japanese yields look pathetic. It appears for now that rates will need to fall again before we can see a sustainable move stronger in the JPY. This makes sense from a carry perspective, but in markets past, there has been little correlation between rate differentials and currency strength so we wouldn't be surprised to eventually see the JPY correlations break down (from 1999 to 2002, the JPY crosses were negatively correlated with equity returns...it certainly appears that we are in a period of paradigm shift here...)

In today's data, keep an eye on the weekly jobless claims out of the US. Last week's number was the 2nd highest of the year and another ugly reading could begin to set up expectations for another bad employment report for June. Watch out for the SNB today, CHF traders. CHF headed stronger vs. EUR yesterday, but remains in the range. We prefer a stronger CHF, but need to see 1.6000 go (and probably also a bond market rally) for this level to fall. Apparently, a significant minority are looking for a rate hike from Roth and company today.

Chart: EURGBP
EURGBP continues to play cat and mouse with the 55-day moving average. The rally from Tuesday keeps the pair embedded in the range, and a break of 0.7955 is needed for a possible move to test 0.8030 resistance.