EURUSD traded from a low of 1.5968 to a high of 1.6002 in Asia, while USDJPY remained in a narrow 102.81-103.12 range. The dollar came under pressure as crude futures reached a new record high at $119.90/barrel overnight. This supported inflation expectations, and with a wire story suggesting that a rate hike by the ECB is not out of the question if inflation does not slow, EURUSD rose to record highs above 1.60 yesterday. Crude continues to be supported by supply concerns related to tensions in Nigeria and a refinery strike in Scotland. Advancing oil prices also took their toll on Wall Street yesterday, dragging consumer-oriented stocks down. As such, and although earnings remained constructive, the S&P 500 lost 0.9%. However, US stock futures are currently trading in the black, with the S&P up by 0.3%. Note also that our UBS FX Risk Index has drifted lower in recent weeks, hovering near to its least risk-averse levels this year. Stress in money markets has also eased somewhat, with the USD 3m Libor over OIS spread contracting 4bp to 88bp. Falling risk aversion has in the past been beneficial to commodity currencies such as AUD, NZD and CAD over the US dollar, JPY and CHF. On the data front, existing home sales fell, but median prices were up 2.6% m/m after declines of 2.1% in Feb and 3.5% in Jan. Our economists see the S&P /Case Shiller data as more important. The April Richmond Fed factory index fell to 0 from +6. Other regional manufacturing measures have been mixed, with the Philly Fed index down and the Empire State measure up. Ahead today, Mortgage Applications and the 2yr-Treasury Note Auction are due. In addition, there are 42 S&P 500-listed companies scheduled to release earnings today. We think the earnings season remains important for risk sentiment, and energy prices for inflation expectations.

EUR: Inflation expectations help currency Hawkish commentary by ECB members continued to lift the euro. ECB council member Noyer said in a radio interview yesterday that interest rate movements can go in either direction, while noting that the ECB will do whatever is needed to ensure that inflation comes below 2% by next year. Although Eurozone growth risks are increasing, persistently hawkish ECB comments and oil at record levels are keeping sentiment on the euro positive. Our economists continue to expect the ECB's next policy step will be a rate cut, but weak data is needed to shift market sentiment from a focus on inflation to growth. We see a risk of high commodity prices negatively impacting consumer sentiment in the Eurozone, and this could finally materialize in less constructive data out of Germany. Hence, we will closely follow Thursday's Ifo release and a below-consensus number is likely to weigh heavily on the euro. Ahead today, Eurozone PMIs are schedule to be released at 0800 GMT. AUD: Inflation Accelerates Australian Q1 CPI was released this morning, and at 4.2% y/y (previous 3.0%, consensus 4.0%), consumer prices accelerated to the highest level in more than 17 years, coming in considerably above market expectations. Although inflation reached levels far above the RBA's comfort zone of 2%-3%, our economists note that increasing signs of slowing demand and the neutral minutes from the central bank's last on-hold meeting suggest that a higher result would be required to stir the RBA into hiking rates again. Going forward we continue to target AUDNZD at 1.21 over three months.

GBP: Minutes due In a speech at the UK-Canada Chamber of Commerce on Tuesday, MPC member Timothy Besley said the newly announced Securities Lending Scheme will help the central bank to concentrate on the inflation outlook. Inflation remained above the BoE's 2% target level since September last year, while measures of inflation expectations remained elevated. Besley is considered to be one of the most hawkish members on the MPC board, and his comments suggest the dilemma that the central bank is facing. From a monetary policy perspective, the BoE will likely wait and see how its mortgage rescue plan unfolds, before easing rates further. This is consistent with our economists' call for the BoE to continue cutting rates every other month, which will bring rates down to 4% by year end. Ahead on Wednesday, we expect MPC's minutes to show an unanimous decision for cutting rates by 25bp at its policy meeting at the beginning of this month. Should any of the board members considered a larger, half point rate cut, GBP rates and with it the currency could come under short-term pressure. Risks remain that the financial crisis is spilling over into the broader economy. With this, the outlook for the pound does not look encouraging. Our 1m and 3m GBPUSD forecasts stay at 1.99 and 1.93, respectively. CAD: BoC cuts, hints at more The Bank of Canada today lowered its overnight lending rate 50bp to 3.0%. With accompanying commentary underscoring a likelihood of further monetary stimulus, our 1m USDCAD forecast of 0.97 appears at risk. We keep our 3m target at 1.02. The BoC exhibited concerns over global growth generally, US growth in particular, and noted ongoing dislocations on financial markets. It judged underlying inflation trending ~2% and sees risks to the price outlook as balanced. The BoC said that growth in the rest of the world has weakened, reflecting the effects of a sharp slowdown in the US and ongoing financial turmoil. For now, buoyant growth in domestic demand, supported by high employment levels and improved terms of trade, has been substantially offset by the fall in net exports. With US growth projections weakening and credit conditions worsening, risks to Canadian growth have risen, too. But while near-term downside risks persist, the BoC retains a core scenario of a recovery in 2009. The BoC will publish a new projection for the economy and inflation, including risks to the projection, in the Monetary Policy Report of Apr. 24. The next BoC meeting is June 10. Our Canada economists currently expect the BoC policy rate to bottom at 2.75%.

Emerging FX TWD: Stagnant but still positive The USDTWD has stagnated above the 30.00 mark in recent weeks as the post-election euphoria subsides. We however think that while some money has been put to work in Taiwan in anticipation of positive economic policy moves and friendlier cross-straits political environment following the change in government, we believe more positive news and flows beckons. According to our calculations, the Taiwan stock exchange has seen net foreign buying of US$3.2 bln since the beginning of the year. But those inflows are lumped during the month of February just ahead of the March presidential election where around US$5 bln net equity buying by foreigners was seen. Excluding February, foreigners have actually been net sellers of Taiwan stocks this year. Indeed, the net foreign buying of Taiwan stocks in the first four months of this year some 10% lower than that was seen during the same period last year. While this is still significantly better than what the rest of the region has seen so far this year - where, of the reporting countries, only Indonesia has seen net fund inflow over the same period - we do not think foreign investors are overly exposed to Taiwan stocks right now. Indeed, our equity research team maintains a positive view of the Taiwan market given that it is still one of the cheapest valuations in Asia. With China and the incoming Taiwan KMT government having kicked off their relationship to a reasonably good start with a successful dialogue earlier this month, we think more positive rhetoric and policy actions from either side of the straits could be forthcoming in the next few weeks around the actual inauguration of the new KMT government on May 20. We do not think the 29.75 priced in by the 3-m USDCNY NDF is excessive. Our recommendation to go long a 1y ATMF USD-put/TWD-call option (strike: 31.80) initiated in October 2007 is now well in the money. We recommend holding on to that trade for now.

Technical FX: AUDUSD Breaks To Fresh Highs EURUSD BULLISH Bull trend alive above 1.5835 support- focus on 1.6067/75 USDJPY BULLISH Move above 102.95 exposes 104.93. Support at 102.26` GBPUSD NEUTRAL With support at 1.9747 intact, the focus is on 2.0027/48 area USDCHF NEUTRAL Range-bound between 1.0284 resistance at 0.987 support AUDUSD BULLISH Up-trend intact with support at 0.9450. The break of 0.9499 opens 0.9620 USDCAD NEUTRAL Remains heavy below 1.0186, targeting 0.9989 then 0.9945 EURCHF BULLISH Bullish above 1.5956 with the focus on 1.6231 EURGBP BULLISH Sharp bounce off 0.7876 exposes 0.8099 once again EURJPY BULLISH Move above 164.06 exposes 166.69 - Support at 163.30