Key Overnight Developments

• Japan’s Current Account Hints Yen to Trend Lower Against US Dollar
• Australian Dollar Ignores Jobs Report as Outcome Matches Forecast

Critical Levels

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The Euro and the British Pound inched lower in overnight trade, sliding 0.1 percent apiece against the US Dollar ahead of interest rate announcements from the European Central Bank and the Bank of England (see below). We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights

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Japan’s Current Account surplus widened to 1470.6 billion yen in February, mirroring the merchandise trade figures released two week ago. Most interestingly, the financial account deficit swelled by nearly a trillion yen from the previous month as foreign investors piled into Japanese bonds, boosting the price of the benchmark10-year note on expectations that an increasingly dovish central bank preoccupied with deflation will translate into lower yields in the future even as the Ministry of Finance issues new debt to finance Japan’s massive budget deficit. Lower domestic yields coupled with Japanese investors’ penchant for relatively safe long-term investments promise to steer them toward US Treasuries, sending the US Dollar higher against the Japanese Yen in the process.

Australian Employment figures showed the economy added 19,600 jobs in March while the unemployment rate held unchanged at 5.3 percent. The outcome – largely in line with economists’ forecasts for a 20,000 increase – failed to excite the markets, leaving the Australian Dollar confined to a narrow range below the 0.93 figure against its US counterpart.

Euro Session: What to Expect

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Interest rate decisions from the European Central Bank and the Bank of England headline a busy economic calendar ahead. However, neither announcement is likely to prove significant from a monetary policy perspective.

In the UK, recent inflation figures have largely supported the central bank’s quarterly forecast published in February, so there seems little reason for Mervyn King and company to meaningfully augment their posture until an updated outlook is produced for the May decision. Indeed, all eyes are likely to remain focused on the upcoming UK general election set to take place on May 6, with markets acutely tuned in to the contest as the outcome promises reveal how the government will approach dealing with its gaping budget deficit.

Meanwhile on the continent, inflation remains comfortably below the central bank’s target level of 2 percent while economic recovery seems to be losing momentum. On balance, this means the ECB is surely in no rush to be raising interest rates, with the bank president Jean-Claude Trichet’s post-announcement press conference likely to stay firmly focused on Greece-related issues. This threatens to weigh on the Euro as the ECB president – who initially opposed IMF involvement in a bailout plan only to reverse his position as the outcome became inevitable – sounds off on recent reports that Athens now seeks to exclude the international lender from rescue efforts because its aid comes with famously demanding conditions.

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