USD and JPY weakness continue after Friday madness and strong ISM. Equities and currencies are pricing robust recovery.

Busy calendar this week - especially for Aussie. Positioning and sentiment are reaching extremes - will event risks throw up any obstacles this week?

MAJOR HEADLINES – PREVIOUS SESSION

* Australia Jul. AiG Performance of Manufacturing Index rose to 44.5 from 38.4 in Jun.

* Japan Jun. Labor Cash Earnings fell -7.1% YoY vs. -3.2% expected

* China Jul. CLSA Manufacturing PMI rose to 52.8 from 51.8 in Jun.

* Germany Jun. Retail Sales fell -1.8% MoM vs. +0.5% expected

* Sweden Jul. Swedbank PMI out at 54.3 vs. 51.5 expected and 50.5 in Jun.

* Switzerland Jul SVME PMI out at 44.3 vs. 43.6 expected and 41.8 in Jun.

* Germany. Jul. Final Manufacturing PMI out at 45.7 vs. 45.2 initial estimate

* EuroZone Jul. Final Manufacturing PMI out at 46.3 vs. 46.0 initial estimate

* UK Jul. Manufacturing PMI out at 50.8 vs. 47.8 expected

* US Jul. ISM Manufacturing out at 48.9 vs. 46.5 expected and 44.8 in Jun.

* US Jul. ISM Prices Paid out at 55.0 vs. 52.0 expected

* US Jun. Construction Spending out at +0.3% MoM vs. -0.5% expected and -0.8% in May

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

* New Zealand Q2 Private Wages and Average Hourly Earnings (2245)

* Australia Jun. Retail Sales (0130)

* Australia Q2 House Price Index (0130)

* Australia RBA Cash Target (0430)

Market Comments:

Recovery fever is running very high now, after last Friday's US GDP data came out slightly less bad then expected and now on the positive Chinese PMI data out to start the week. Words of optimism are creeping from every corner and the overbought equity market still seem to be able to find a reason to rally even further. This July was the best July for stocks since some time back in the 1930's. The US Nasdaq Index is up over 60% from its March low. The Shanghai composite has more than doubled from its low last October. One major bank was out revising its GDP call for the US economy upwards, now expecting 2.0% in Q3 and 2.5% in Q4. In FX, the market has largely reacted as one would expect - commodity currencies are bashing their way to new highs and the USD and JPY are weaker. Some of Friday's aggravated action may have been a result of end-of-month fixing flows. The extent of the risk in risk appetite continues to astound us, and this all feels way overdone, but markets can remain irrational longer than you can remain liquid, as the saying goes. But we will persist with our view here that this cannot continue much longer. Positioning levels are extreme. Risk sentiment levels are extreme. Something has to give, and soon.

The data out of the EuroZone this morning hardly supports EURUSD above 1.4300, but the EUR is being dragged higher versus the greenback per default as the USD is the weakling of the major currencies at the moment. The pair is now back just below its highs of the cycle, but even if this risk bonanza continues in the near future, it is hard to find reason for any major impulse higher. After all, US and UK numbers are improving more rapidly than EuroZone numbers and the Euro has moved into a well-defined downtrend versus the broader market. European bond yields are also falling rapidly vs. their US counterparts, making the Euro less attractive from a yield perspective. With EURUSD implied volatility dipping to pre-Lehman levels, it may be worth investigating selling upside volatility to pay for downside volatility as EURUSD approaches 1.4500 or on the first signs of a decent technical reversal.

Looking ahead at the major data highlights this week:

Tuesday:

- Australia: (tonight) June Retail Sales and RBA decision. The message from the RBA on the latter is especially interesting as the market considers the RBA as the odds-on favorite for being the first to hike rates for the cycle as the global economy supposedly is poised for a strong recovery. This is an interesting test for the Aussie tonight as the market is pricing perfection.

- US Personal Income/Spending and PCE Core: inflation is more in focus on these numbers, though it is stale data....

Wednesday

- Australia: June Trade Balance, July AiG Performance of Services Index. The AiG number managed to nudge above 50 for the first time since early 2008 in June. Needs to continue ever higher to justify rosy market outlook for the currency.

- EuroZone: Final July EuroZone PMI Services data. still showing contracting services sector

- UK: July Services PMI. Expected to show a reading above 50 again as UK numbers continue to look better than those for the rest of the EuroZone.

- US July ADP Employment Change. Market looking for a better number at -350k

- US July ISM Non-manufacturing. The services sector is still contracting if this reading comes in below 50 as expected.

Thursday

- New Zealand July Unemployment Rate and Employment Change - employment picture continues to worsen, but other data is very supportive for NZ.

- Australia July Unemployment and Employment Change - unemployment continues to ramp higher despite the supposed strength of the economy down under.

- UK BoE to announce rates. The buzz about the Bank of England and the potential for it to raise rates may continue if UK data continues to look strong and as long as risk aversion doesn't return. But is the BoE really all that close to a rate move?

- EuroZone ECB rate announcement. The ECB is going absolutely nowhere with rates as long as the economy looks this bad. If markets and risk appetite weren't so peppy of late, we might even be looking for a cut from the bank, but no change is the overwhelming consensus yet again.

Friday

- UK July PPI Input/Output. This measure of inflation is showing no danger of inflation just yet.

- Canada July Ivey PMI, July Unemployment Rate and Net Change in Employment. Canadian unemployment continues to ramp scarily. Market is looking at the recovery scenario and oil prices at the moment, however.

- US July Unemployment Rate and Change in Nonfarm Payrolls - market is looking for a trend to develop here in better and better numbers after the weekly initial claims data has finally begun to ease and the unemployment rate showed its smallest increase since last fall. But signs are that unemployment benefits may be extended again soon - and this will eliminate the silly statistical phenomenon of the "discouraged worker" not showing up in the unemployment ranks...The key for the employment picture is the September to January time frame, normally the worst time of the year for job losses. A failure of the job market to recover in this time frame will mean any recovery will underwhelm and will increase the risk of an ugly double dip.

Chart: AUDUSD AUDUSD

Is charging confidently higher in this environment of feverish expectations for a strong global recovery led by China and all of the commodity purchasing such a scenario would entail. This week should test whether the rally is sustainable in the short term, with the RBA up tonight and a very heavy calendar down under this week. Looking at the technical side of things, the AUDUSD chart exhibits a classic Elliot-wave pattern, with the latest action forming the fifth wave. How long will this fifth wave extend? The most interesting resistance level on the longer term chart is just above 0.8500, which was a previous major low that was retested once broken on the way into last fall's debacle. AUDUSD is now the farthest above its 200-day moving average it has been since 1996 (of course, the conditions that took the 200-day moving average so low was the cliff-dive of last fall, when the pair traded as much as 46% below its 200-day MA.