The US dollar weakened overnight partly motivated by a sharp rise in jobless claims. EURUSD traded up from lows of 1.5510 up to a high in the US session of 1.5696, while USDJPY traded from highs of 102.95 down to low of 102.07. US equity markets performed strongly, with the S&P500 up by 1.8%. Jobless claims for the week of March 29 rose to 407k, up from 369k the week prior, but were distorted by the impact of the Good Friday holiday. Meanwhile, the non-manufacturing ISM index rose slightly to 49.6 in March, beating expectations of 48.5. Both the manufacturing and the non-manufacturing ISMs are only pointing to a mild recession so far. Against this backdrop, Eurozone data has been deteriorating this week, with retail sales and services PMI yesterday coming in soft. The data will make it easier for the dollar to recover as investors will question how much longer the ECB can maintain their hawkish stance.

Today the focus is on US non-farm payrolls - our economists look for -75k decline in March, slightly more pessimistic than market of -50k, and will be the fourth consecutive drop in private sector payrolls. We think it's possible for the US dollar to strengthen despite a weak economy, providing that Eurozone data continues to deteriorate and that the Federal Reserve does not take action that would suggest a monetising of MBS woes. Note that the 10-year TIP bond spread suggests long-term inflation expectations are well contained at just 2.35%, down from the highs above 2.5% registered in early March. We continue to target EURUSD at 1.55 over 1 month and 1.47 over 3 months.

Ahead today, the payrolls report is due at 1230 GMT. Fed officials Pianalto and Kroszner speak at 1245GMT and 1845 GMT respectively.

At -0.2% y/y and -0.5% m/m the retail sales release in the Eurozone was fairly below market expectations, pointing to fading consumer demand. At 51.8 (cons. 51.9, previous: 52.8) PMI was released broadly in-line with market expectations. However, services PMI in Spain and Germany disappointed considerably, and At 40.9 (previous. 46.1) the Spanish PMI contracted at the strongest pace in the indicator's nine year history. Forward looking indicators also remain at record lows. Elsewhere, France's Lagarde highlighted that the crisis can only be overcome by coordination between all G7 members, and that states should take a center stage with regard to high commodity prices. Overall the latest news-flow confirms our view of deteriorating growth conditions in the Eurozone, and the latest acceleration of inflation expectations will likely lose steam. Hence we remain short EURUSD as a trade recommendation, initially targeting 1.5200.

The services PMI reading fell to 52.1, well below market's expectations of 53.3 and down from 54.0 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 this week, 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.

MoF security flow data for the week ended March 29 showed net inflows of Y277bn, as foreigners scaled back their disposal of Japanese assets. Foreigners sold Y389 bn in the latest week, versus the massive Y2.53 tn in sales the recorded the week prior. Foreigners have been heavy sellers of Japanese bonds in recent weeks, perhaps taking profit on long JGB positions in a need to raise funds to cover losses elsewhere. In the aftermath of the poor Tankan result earlier in the week, the focus has been on whether the BoJ will cut rates in the coming months. OIS markets are pricing in 18.5bp of rate cuts over the next 12 months, but without any clear preference for any individual month. The BoJ meet for a board meeting next week ahead of the G7 meeting. We agree with consensus that rates will be kept on hold and will likely remain so for the remainder of the year. We think the yen will remain firm due to periodic de-leveraging in global markets and target USDJPY at 100 over 3 months.

RBA Governor Stevens testified to parliament this morning 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 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. Stevens' comments were slightly less hawkish. We like upside in GBPAUD on a 1 to 3-month view, based on the notion that Australia should experience some of the pain and uncertainty that the UK is currently experiencing with respect to its mortgage market.