[Dan]

Market liquidity is very thin with the UK and the US in holiday mode. World equity markets are rather flattish, with Asian markets largely nonplussed by news of the North Korean nuclear test. It seems that the fact that that the Japanese government raised its assessment of the economy for the first time in three years outweighed the maniacal machinations of a rogue state.

FX: USD is winning the battle today, but liquidity is thin don’t read too much into it. Even so, we have seen some of the currencies that have made monster gains in recent weeks give some back. CAD is a bottom feeder. Even so USD/CAD has only backed up to just over 1.1250. AUD is also trailing much of the G10, but it continues to linger around 0.79, after moving up 15 big figures since early March. EUR remains near 1.4000, but could not quite maintain its grip as German businesses did not become as optimistic as the market wished.

USD: President Obama caused a stir by noting, in relation to the US fiscal situation, that “we are out of money.” The source of the comment is a surprise. Little on the US calendar today, but this week brings new and existing home sales for April. Existing home sales have been propped up for months by distressed sales (foreclosed properties). Foreclosures are increasing, but rather than at the fringe of the US housing market (speculators and the subprime crowd), the mounting toll of failure is among those who acted responsibly but are now out of work and falling behind thanks to a 17 month recession. Worryingly this is when the real (cyclical) trouble starts in the US housing sector. Hard to see many green shoots there.

EUR: One of the few data releases overnight was the May German Ifo business climate survey. It came it at 84.2 (cons: 85.0), with the current assessment a bit disappointing at 82.5 (cons: 84.5), while expectations were better 85.9 (cons: 85.5). As noted, this caused markets to trim EUR’s gains, but the pullback has been moderate in the extreme.

CAD: There are no official statements planned ahead of the June 4 rate setting meeting, meaning that the recent CAD surge versus USD will go without comment for now. The data flow ahead of the BoC is sparse, only the Q1 current account deficit. However, with the external imbalance set to increase to a deficit of C$10.5bn, with Q1 GDP due June 1, Canada is set to post its first 4Q current account deficit since 1999Q3. While it would only be -0.3% of GDP, it does expose that Canada has been running a massive real trade deficit for years that was only papered over by skyrocketing commodity prices. Although oil prices are well above their recent lows, the outlook for global demand remains shaky and the Canadian economy is still adjusting to the real trade imbalance. The last thing the BoC needs right now is a strong Canadian dollar. Something to ponder ahead of June 4.

AUD: RBA Dept Governor Battellino (Thu) and private sector credit (Fri) could provide some short-term AUD direction, but it is generally a quiet week for Aussie events and data releases and as such AUD will most likely continue to follow the global risk themes closely.

NZD: Budget week. With fiscal policies and national debt again in the spotlight and NZ already on a “negative” ratings outlook, the tabling of the budget on Thursday will be very closely watched