EURUSD traded in the upper half of its 1.5792-1.5948 range in New York, while USDJPY stayed heavy, hardly recovering from its European session low of 102.98. Risk appetite stayed neutral with the S&P 500 recouping early losses to close flat on the day. Our most recent Equities for FX update revealed that US dollar-supportive repatriation flows were partly reversed last week. At USD 1.82bn (vs. USD 0.13bn the week before), the US suffered another capital outflow with domestic clients' buying foreign equities. In the news, Chicago Fed President Charles Evans said that the US economy should avoid "high inflation". The OIS market continues to price in a 25bp cut at the April 30 FOMC meeting rather than the half-point it was pricing in early April. We expect data this week to show that durable goods orders and new home sales fell in March, although both have probably declined to a lesser extent than in previous months. With the market converging on our view that too much negative news has been priced into the dollar - while slowing growth has yet to fully feed through into the euro's pricing - we remain short EURUSD, targeting 1.52.

Existing home sales data will be key Tuesday. While home sales-related data have shown signs of stabilisation, our economists are not yet calling the turn in sales. Note for home prices to stabilise, decreasing inventories will be needed. The Fed is scheduled to offer US$50 bn in 28-day credit through its Term Auction Facility (TAF) to depository institutions, with the results of the auction also out on Tuesday.

Over the past few months, firm energy prices have fuelled Eurozone inflation expectations. This is likely to start taking its toll on consumer sentiment as well, increasing growth risks. As such we will closely follow this week's releases of the German Ifo and the Eurozone Manufacturing PMIs. With European officials having last week indicated that the euro's current levels are undesirable, markets will be paying particular attention to ECB President Trichet's speech Thursday and Bundesbank President Weber on Friday. Watch also for comments about intra-EMU economic divergence, as this also poses downside risks for the euro. For now, the EUR has been strong also on the key crosses.

At 3.9% y/y (cons: 3.5%, previous: 3.6%) today's Swiss March PPI came in considerably above market expectations. The number was mainly driven by higher import prices, which in turn have been mainly driven by higher energy prices. As such, upside risks to price stability remain in place, although mainly driven by external factors. However, SNB President Jean-Pierre Roth just recently said that inflation should ease towards year-end, as he expects energy prices to lose upside momentum. Our economists expect the SNB to remain on hold for the foreseeable future, and hence the CHF will remain exposed to risk sentiment for now.

The Bank of England Monday announced the details of its mortgage rescue plan. Under the scheme, the central bank will swap UK government bonds for commercial banks' mortgage securities for a fee to alleviate pressures in the funds lending money market. The swap will be for a period of one year, with a possibility to renew for a total of three years. The length of these transactions will provide banks with the certainty about liquidity that is needed to boost confidence. An important feature of the plan is that the risk of losses on loans will remain with the banks. Although the scheme was initially reported to be limited to GBP50 bln, in a later briefing BoE Governor King said there will be no upper limit. According to former MPC member Buiter the central bank will likely end up needing to provide facilities for GBP100 bln - double the initial amount - to get the mortgage market back to normal. The pound tumbled on market disappointment with the plan, after anticipation of its release had sent sterling sharply higher on Friday; June short sterling also fell Monday. It is probably too early to judge whether the BoE plan will be a success. It is clear, however, that the UK central bank is trying to avoid the Fed's mistakes at its first TSLF auction. High costs and barriers will likely make sure only those with genuine funding issues will have access to the facility. We maintain our bearish stance on the pound, and prefer to express sterling weakness by selling cable.

We expect the BoC to ease rates by 25bp to 3.25% on Tuesday. If anything, there are risks for a 50bp move. The OIS curve is pricing in 48bp of easing, and inflation has decelerated from 2.5% in November to 1.4% in March despite strong retail sales and solid employment growth. House prices have held up well so far. However, the US growth outlook stays weak and tighter credit conditions are expected to hurt the banking and corporate sectors. In its Business Outlook Survey, firms interviewed by the BoC reported tighter credit conditions for the third consecutive quarter. Important for economic activity, future sales growth over the next year is expected to fall sharply. More BoC easing is on the cards and UBS expects rates to reach 2.5% by year-end. USDCAD has been kept in a tight 0.98-1.03 range due to the interest rate outlook, strong commodity prices and recently rising risk appetite. We are keeping our 1- and 3-month forecasts for USDCAD at 0.97 and 1.02, respectively. In our view, any CAD weakness, potentially induced by a 50bp cut on Tuesday, should be played on the crosses and we favour downside in CADCHF and CADNOK.

Australian producer prices for Q1 released Monday rose by 1.9% q/q, well exceeding market expectations of 1% q/q. Domestic prices in particular rose by 2% q/q, a record increase since the series began in 1998; this reflects strong economic activity in H2 2008. The data reduces the scope for the RBA to cut rates by year end, and indeed OIS markets are currently pricing in only 6bp of easing by Christmas. More timely activity data, however, suggests that the economy has been slowing markedly from February onwards, and reduced domestic demand should ease inflationary pressures. AUDUSD is elevated due to an improvement in risk appetite and still-high EURUSD levels. We expect AUDUSD to trade lower, and target 0.9100 in both one and three months. For now look for more AUD strength; Q1 CPI is due Wednesday, and our economists see some upside risks to their +0.8% q/q forecast for core price inflation given today's PPI data.