London Session

The AUD/USD and NZD/USD surged in European hours this morning as the market embraced the view that not only is the global economy stabilising but that countries with proximity to China may see the swiftest recoveries.
AUD/USD spiked to the 0.7460 area before encountering buyers. NZD/USD continues to creep higher, edging through the 0.5820 area.

The optimism in China has been built around last month's stronger than expected Q1 GDP data (6.1%) and the more recent release of form PMI. At 50.1 in April (from 44.8 in March), the CLSA manufacturing PMI is showing signs of actual expansion. This is in strong contrast with PMI surveys of most other nations which, while stabilising, are continuing to highlight the prevalence of contraction.
The theme of stabilisation in the Chinese economy was highlighted by the RBA overnight. While RBA rates were left unchanged, as expected, overnight the tone of the accompanying press release highlighted that fragile confidence was now relevant to the economic outlook.

Sterling has also staged a decent performance overnight. After its early gains cable met with resistance in the 1.5100 area while EUR/GBP bounced off the 0.8850 level. A better tone in sterling is consistent with the market becoming less risk adverse.
However, economic data in the UK, while improving, is still consistent with a painful economic downturn this year meaning that sterling rallies could be vulnerable on more bad news.

Soft Eurozone PPI data this morning (-3.1% y/y) will serve to strengthen the focus on the ECB policy meeting this week. The market is expecting a 25 bp rate cut to 1%.
More interesting will be the measures that ECB announces with respect to non-conventional polices (quantitative easing). Technically, more easing from the ECB should be currency negative. However, the EUR is set to strengthen this week if generalised optimism on the global economy persists. Also of interest this week will be any news from the German government on measures to address toxic assets in the domestic banking sector. The German government has downgraded its growth forecast for the German economy in 2009 to -6% suggesting that bad loans are set to increase. The market this week is becoming less worried about the potential for shocks from the publication on May 7 of the US banks' stress test. Relatively good news on the front could open the way for another move back to the EUR/USD1.300 area and push USD/JPY back to 100. However, the present less risk adverse mood will leave the markets vulnerable to bad news.

The ISM non-manufacturing index and the US ABC consumer confidence data for April are due for release today.