The US dollar weakened on Friday on the back of a softer-than-expected payrolls report, with EURUSD trading up to a high of 1.5775 from a low of 1.5681, while USDJPY traded down to a low of 101.46 from a high of 102.61. Stock markets were flat and US 2-year Treasury yields fell by 7bp while the curve flattened. Non-farm payrolls for March dropped by 80k in March, eclipsing expectations of a 50k decline, while January and February results were also revised lower. The markets are currently pricing in 29bp of rate cuts at the April meeting, suggesting some chance of a 50bp move is being factored in. Data this week is unlikely to cause major shifts in Fed expectations. Pending home sales for February is of greatest interest and is due on Tuesday, while the Uni of Michigan consumer sentiment index for early April is due on Friday. Also of note are the March FOMC minutes, which are due on Tuesday. The minutes could be supportive of the dollar, given the Fed signalled uncertainty over the inflation outlook at the March FOMC meeting, suggesting that the Fed is reluctant to cut rates further. Outside of the data treadmill, the G7 meeting on the weekend will be the focus with financial market regulation likely to be the main topic of conversation. We think joint intervention is unlikely, particularly given our view that the USD should stabilise. All up we maintain a positive stance on the US dollar, and note that our economists believe that the decline in payrolls on Friday is still only consistent with a mild recession. We target EURUSD at 1.55 over 1 month and 1.47 over 3 months. Ahead today, consumer credit for February is due at 1500 GMT, while Fed's Yellen and Kohn speak at 1730 GMT.

The BoJ announces rates on Tuesday but is likely to keep rates on hold. Otherwise this week it's relatively light on the data front with machinery orders for February and the current account surplus for March both due on Thursday and the corporate goods price index due on Friday. Last week it was revealed by the press that the government was considering nominating newly appointed BoJ Deputy Governor Shirakawa for the BoJ governor role while former MoF head of FX intervention Hiroshi Watanabe was being considered for the deputy governor role. While the opposition DPJ has being sending positive signals with regards to Shirakawa, predictably DPJ chief Ozawa is indicating he may reject Watanabe due to his background in the MoF. The government is keen to have the governor position at least filled in time for this weekend's G7 meeting. However, the discussions on the BoJ are not having a discernable impact on the yen and rate expectations, with the markets pricing in 15bp of rate cuts over the next 12 months. We maintain our bullish yen targets with USDJPY at 98 over 1 month and 100 over 3 months based on the view that risk aversion will remain high.

The ECB meet this week but we think they will rates on hold. ECB President Trichet spoke over the weekend and said that there was resilience in the Eurozone in Q1 - a comment consistent with the ECB maintaining its hawkish bias for now. However, German industrial orders for February were released on Friday and declined by 0.5% m/m, disappointing expectations of a 0.9% m/m rise. The fall was mainly due to declining orders from outside the Eurozone and suggests that the slowdown in export volumes should intensify in coming months. On the policy side, ECB's Constancio said that slower Eurozone growth should help to slow inflation, and that he saw no general pattern of second-round wage pressures, apart from only some isolated episodes. Overall the latest news-flow confirms our view of deteriorating growth conditions in the Eurozone and we are short EURUSD as a trade recommendation, initially targeting 1.5200.

RBA Stevens testified to parliament on Friday and came across as slightly less hawkish, providing evidence as to why the bank needed to tighten policy this year, while at the same time noting that domestic demand looks to be moderating. He said that he thinks inflation will abate a little sooner than he previously expected, but stressed uncertainty over the economic outlook. He also discussed the impact of Australia's terms of trade, and pointed to higher contract prices in coal and iron ore prices, which should lift the terms of trade by 15% or so and add 2-3% to national income. His outlook for moderating domestic demand was reinforced subsequently with the release of retail sales later in the morning. Retail sales for February fell by 0.1% m/m, against expectations of a 0.3% m/m rise. The data shows the first signs of slowing in "real" economic data, as opposed to leading indicators such as credit and confidence. The data supports our neutral to bearish view on the AUD. We particularly like upside potential for GBPAUD as a low vol view that negative sentiment on the housing market is already expressed in current levels of the GBP, while for AUD there is room for additional disappointment. NZD is a more extreme example, and we in turn like upside in AUDNZD on a 1-3 month view. This morning, the trade balance, building approvals and job ads are all due at 0130 GMT.