The US dollar strengthened overnight due to firmer than expected PPI, with EURUSD trading down to a low of 1.5751 from a high of 1.5847 in the American session, while USDJPY traded up to a high of 101.84 from a low of 100.97. The stock markets also improved, with the S&P500 up by 0.5% while 2-year Treasury yields rose by 6bp.

PPI for March rose by 1.1% m/m, exceeding market expectations of +0.6% m/m and up from +0.3% m/m in February. The y/y level now stands at 6.9% y/y, although core PPI readings are more contained at 2.7% y/y. The Empire State manufacturing index for April rose to 0.63 from -22.23 in March, well above market expectations of -17 and provides yet more evidence that the recession in the US is likely to be shallow. The TIC report for February showed that portfolio inflows returned to the US in that month, with net inflows of US$72.5bn, up from US$42.2bn in January. Foreigners returned to agency debt in that month acquiring US$36.9bn versus US$13.6bn the month prior. For further analysis on the February TIC report please see our FX Note, "Encouraging TIC Data".

A US dollar recovery will require the Fed to focus more on inflation concerns, and so comments tonight by Fed's Yellen and Mishkin will be important. Note though that Yellen has remained dovish in recent commentary. Also, the ECB needs to adopt a more neutral bias, hence German CPI at 0600 GMT will also be important. However, French inflation released yesterday was very strong. As such, while we expect a stronger dollar from current levels, a near-term catalyst for a correction lower is lacking. What we can say is that upside for EURUSD is limited. We continue to target EURUSD at 1.55 over 1 month and 1.47 over 3 months.

Ahead today, a number of major financial and non-financial corporations release their earnings today. Housing starts for March are due at 1230 GMT. Fed's Yellen, Plosser and Mishkin are all scheduled to speak. The Fed's Beige Book is due at 1800 GMT.

RBA minutes to the April meeting released yesterday revealed that the RBA is well and truly on a neutral bias. Following the minutes our economists note it would take a particularly strong Q1 CPI to justify a near-term rate hike. On the domestic side, the RBA noted that wages were "reasonably contained" and pointed to weaker retail data, softer housing finance, slowing credit growth and lower auction clearance rates. On the international side, the RBA said that growth in Asian and emerging economies will remain at "good levels" but will likely slow from earlier years. AUD actually rose following the release and similarly neutral comments from RBA Governor Glenn Stevens, possibly on the back of news reports that a China sovereign wealth fund had acquired a stake in a major UK energy company. The global economy is show varying lags in how the global credit shock is transmitted to each economy. The US dollar was the first to weaken as the Fed swiftly cut rates, the GBP has already begun weakening for similar reasons. NZD is already declining against the AUD, but even the AUD looks poised to experience weakness in the months ahead. We target AUDUSD at 0.9100 over 1 and 3 months.

Germany's April ZEW sentiment index was reported at -40.7, far worse than a consensus forecast for -30.0 and down on March's -32.0. The current situation index held up well, coming in at 33.2 versus a consensus for 32.8 and 32.1 last month. With inflation data looming in Europe and elsewhere this week, we expect ECB members to voice vigilance against inflation despite challenging growth conditions. In a speech made on Monday, the ECB's ECB member Gonzalez-Paramo said that the amount of collateral held within the Eurosystem had risen by EUR 200bln to EUR 800bln since H1 2007, 20% of which is now in asset-backed securities. The collateral is well in excess of requirements for the ECB's current open-market operations, pointing to expectations of firm demand for liquidity in the medium term and testing conditions for Eurozone banks. We expect Eurozone growth and financial health will face greater scrutiny up ahead and target a medium term retreat for the currency against the majors.

UK CPI inflation, at 2.5% y/y, they came in below expectations (cons. 2.6%). RPI inflation moderated to 3.8% vs. 3.9% expected. Lower than expected inflation gives the MPC room to cut interest rates by more than its own forecasts. We expect the next rate cut in June, supporting our view for cable to retreat further. The RIC house price balance for March came in a t -78.5, weaker than market expectations of -67. The house price balance result is the lowest since the series began in January 1978, indicating further deterioration in housing market sentiment in the UK. A RICS spokesman noted that the slowdown is directly attributable to a lack of available finance, which has hit demand. However, until new supply increases dramatically, a significant crash remains unlikely. In other news, the Telegraph reported this morning that a Chinese Sovereign Wealth fund has built up a 1% stake in a major UK oil producer. We have recently expressed concern that the BoE's troubling tolerance for sterling weakness may result in a sharp reduction in official buying of GBP by reserve managers, but UK assets may be looking attractive at current levels and offer opportunities for countries seeking sustained diversification in the face of dollar weakness.

Our studies show that the CAD underperforms consistently in times of risk aversion and deleveraging, like now. The BoC's Business Outlook Survey released on Monday highlighted downside risks to economic developments. Norway's fundamentals appear more stable. The NOK is holding up well against the EUR, and we continue to see value in holding the krone as a defensive play. Our stop loss is at 4.9918. Firms interviewed by BoC regional offices signalled concerns over future sales growth and tightening credit conditions; the balance of opinion from future sales growth fell to the lowest level since 2001. Inflation expectations remain contained, with a vast majority still expecting inflation to fall within the Bank of Canada's inflation-control range of 1-3%. CPI is due on Thursday and the BoC meet next week. Our economists look for a 25bp cut to 2.75%, whereas CAD OIS prices 42bp of easing. In our opinion, Norges Bank will be the only Western European central bank hiking rates in the period ahead. On the back of worrying cost pressures, Norges Bank has indicated the possibility of a further 50bp of hikes over the next few quarters. We believe that an April hike, to 5.50%, will prove to be the peak, especially given the dislocations in the short end of the market. The calendar is light for Norway this week, with only the trade balance to note.