USDJPY and EURJPY continued to recover in New York, trading in a 101.92-102.84 and 158.55-160.75 range, respectively. EURUSD traded up from 1.5578 to 1.5690. US stock markets moved sideways with financials preserving their gains from recent days (Chart 1). Crude oil advanced more than $3/bl and energy stocks advanced due to the US fuel supply drop. Gasoline stockpiles declined 4.53 million barrels. Crude can be pulled higher by gasoline in the spring and summer season when refiners increase demand for crude in order to bolster output of fuel. In economic news, the ADP estimate of private payrolls in March was 8k (cons: -45k). Our economists say this would be consistent with about a +30k change in total payrolls in Friday's employment report (UBSe -75k, cons: -50k). In his testimony to the Joint Economic Committee on Wednesday, Chairman Bernanke conceded that we may see some economic contraction in the first half of the year, but maintained that we will return to trend or above-trend growth in 2009. He predicted a somewhat higher unemployment rate, as well as continuing declines in housing in the near term. While inflation is a concern, he expects it to moderate. Those who were looking for any reference to future action were left disappointed. We believe current levels are attractive to sell EURUSD. UBS FX Flow monitor has registered strong repatriation trends in favour of the dollar from risk markets, and our Equity Flow Monitor also indicates decreasing selling momentum in US equities. The market is trading close to our 1-m target of 1.55, and expects the pair to move towards 1.47 in the medium-term.

Ahead on Thursday, we are expecting Initial Jobless Claims (UBSe 370 k, cons 365 k, prev. 366 k) and Non-Manufacturing ISM for March (UBSe 48, cons 48.6, prev. 49.3).

The PMI reading released on Wednesday showed UK construction sector activity surprisingly slowing in March. The index fell to 47.2, well below market's expectations of 52 and down from 52.4 in February. Tighter credit conditions domestically and globally is putting downward pressure of growth in the housing market. The ongoing slowdown in commercial and residential property markets, suggests corporates as well as households are being hurt in the tougher funding environment. As further evidence to this, BoE Q4 housing equity withdrawal data, also released yesterday, showed a drop to GBP 7.3bn from GBP 9.5bn in the previous quarter, and we expect such trend to continue in Q1. In addition, mortgage approvals decreased to 73k in February from 74k in January, pointing to a decrease in housing activity. In contrast, consumer credit unexpectedly strengthened, increasing to GBP 2.4bn -nearly s 5 and a half year high. However, as BBC reported later on Wednesday, a puzzling jump in consumer credit was mainly because of the higher borrowings from the Student Loan Company, necessary to repay tuition fees. Despite the concerns in the housing market, the BoE policy decision next week remains a close call as risk to higher inflation have shown little signs of having subsided. The pound has rallied on markets' speculation the BoE might yet delay its next cut to May. However, a sharp deterioration in credit markets is a strong enough case to put economic development at risk, according to our economists who expect the Bank of England to reduce rates to 5% on April 10. Ahead today, PMI services release will be of note at 8:30 GMT (UBS: 53.5, cons: 53.3, last: 54).

At 5.3% y/y (cons. 5.2%, previous: 4.9%) Euro-zone PPI for February came in broadly consistent with market expectations. Similar to Monday's release of Consumer Prices, the number was mainly driven by energy prices, which has lost upside momentum recently. Our economists note, that we should have already seen a large part of pass through effects to consumer prices in the last CPI release. This is in-line with our view that energy prices will unlikely contribute further to increasing inflation expectations. On the policy side, ECB's Alumnia highlighted that the scale of the financial crisis remains unclear, and that a lack of trust in banks persists. He also highlighted that most sectors are yet not experiencing problems related to the strong Euro. In contrast, the German DIW Economic Institute trimmed its growth forecast to 2.0% from 2.1%. They expected that no more positive drivers will come from foreign trade, due to the weaker global economy and the single currency's appreciation against the dollar. In Switzerland, SNB's Jordan highlighted that the credit crisis is not over, as banks need to restore confidence. Uncertainties in financial markets are expected to last, according to Jordan.

The AUD has benefited from improved risk appetite as evident in the strong gains in the S&P500, but has suffered from weaker commodity prices, with gold trading below US$900/ounce. There wasn't much in the way of macro developments today, but it was interesting to hear Treasury official David Gruen discuss recent economic developments. Gruen, when working for the RBA, wrote a number of influential papers on the AUD, relating it to commodity prices. In his comments today, Gruen said that Australia's terms of trade boom has "significantly further to run", even while projecting that global growth will around or below trend in 2008. On Friday, Governor Glenn Stevens delivers his testimony to parliament, and retail sales for February are due. We would recommend long GBPAUD positions based on the view that the ongoing credit turmoil may yet more seriously impact Australia's housing market, while GBP has already suffered due to the subprime crisis. We think gains in the AUD will be capped given the ongoing unwind in commodity prices and target AUDUSD at 0.9100 over 1 and 3 months.