Let The Quarter Begin: All Eyes On Draghi

AUD/USD: Short -Term Outlook Data And LevelsNZD: Chinese Manufacturing Activity Increases But Less Than ForecastCAD: Oil Down, Gold UpDollar Weakens On Disappointing ISM Manufacturing NumbersUSD/JPY Down Nearly 1% On Lower ISM And NikkeiEUR: All Eyes On ECB Meeting This WeekGBP: Looking For Lower PMIAUD/USD: Short Term Outlook Data And Levels
We are mixing things up and starting our note with the Australian dollar. It's Easter Monday, April Fools and the first day of the second quarter -- so why not. We're watching the AUD/USD closely because the Reserve Bank of Australia will make its monetary policy announcement this evening. Following weaker than expected U.S. ISM manufacturing numbers, the currency pair staged a nice intraday recovery after having traded as low as 1.0386. While this suggests we could see a stronger recovery towards 1.05, technicals matter little when we have a big event risk like the RBA meeting. The central bank is widely expected to leave interest rates unchanged at 3% and that leaves the focus on Central Bank Governor Glenn Steven's commentary. If he maintains his glass half full view on the economy and sounds relatively optimistic, the gains seen today could turn into a stronger recovery that takes the AUD/USD to its next key resistance level of 1.05. However if he sounds overly concerned about the strength of the currency and outlook for mining investment, today's gains could evaporate quickly as the AUD/USD tumbles to its 50-day SMA and next support level of 1.0350.

Since the last monetary policy meeting, we have seen improvements in Chinese data. While last night's manufacturing PMI index fell short of expectations, manufacturing activity in China still increased in March compared to February. In Australia, labor market conditions have also improved significantly with the country enjoying its strongest pace of job growth in 13 years. Although most of this was in part time work, it was nonetheless a very large improvement that will translate into stronger consumer consumption. Retail sales increased nicely in January but February numbers won't be released until after the RBA meeting but consumer and business confidence have improved. Australian shares also climbed to five-year highs since the last meeting, giving the RBA very little reason to be worried. Yet the central bank has a tendency of growing uncomfortable when the AUD/USD is trading near 1.05 and their desire to keep it below that level could encourage to a bit more caution from the RBA. We believe that the odds still favor optimism and if we are right, we will see 1.05 before 1.03 in the AUD/USD. Aside from the RBA rate decision manufacturing PMI numbers are also scheduled for release this evening.

Dollar Weakens On Disappointing ISM Manufacturing Numbers
The only excitement that we had in the North American trading session today was the release of ISM manufacturing numbers. The dollar weakened against all of the major currencies after the ISM index dropped to 51.3 from 54.2. While this was only a three-month low in the report, the deterioration was more significant than anticipated and raises concerns about the pace of recovery in the manufacturing sector. There was broad based declines in many of the underlying components such as prices paid, new orders, production backlogs and supplier deliveries but beneath the weakness there was also strength. Employment conditions rose to its highest level since July of last year while new export increased to its highest level since April of 2012. Nonetheless as we wrote in this morning's note on the Top 3 Opportunities in FX this Week, weak data has a larger impact on the dollar than good data these days because of its immediate implications for monetary policy. Fed officials are extremely skeptical about the sustainability of recent improvements and have made it clear that they want to see a few months of good data before taking the idea of varying asset purchases more seriously. Weaker data on the other hand immediately reduces the chance of any preemptive changes in monetary policy. Construction spending increased 1.2%, but the upside surprise failed to offset the disappointment in ISM. U.S. factory orders are due for release Tuesday along with speeches by four Federal Reserve Presidents -- Kocherlakota, Lockhart, Evans and Lacker (Evans is the only FOMC voter).

USD/JPY Down Nearly 1% On Lower ISM And Nikkei
The biggest move in the FX market today was in the Japanese Yen, which rose nearly 1% against the British pound, U.S., Australian, New Zealand and Canadian dollars. Overnight a smaller than expected improvement in Japanese business confidence sent the Nikkei tumbling more than 2%. USD/JPY has a positive correlation with the Nikkei which means that it tends to rise when Japanese stocks rally and fall when equities tumble. Tonight's slide in stocks combined with the lack of liquidity in Asia and Europe led to a big move in USD/JPY and all other Yen crosses. According to the Quarterly Tankan survey, Japanese business confidence improved in the first quarter but less than economists anticipated. The index rose from -12 to -8 compared to a forecast of -7. While the miss was small, the details of the report showed companies looking to cut investment by the most since the global recession. This will be an important factor in this week's Bank of Japan rate decision. We believe that the central bank will increase stimulus this week but the short Yen trade has become extremely crowded and we suspect that part of the sell-off in USD/JPY today could be caused by profit taking ahead of the rate decision.

EUR: All Eyes On ECB Meeting This Week
European markets were closed Monday, which meant that it was a quiet day for the euro. There was some talk that lenders may loosen their terms on the Cyprus bailout but none of that has been confirmed and we doubt that the EU met during the Easter Holidays. Final euro-zone PMI numbers are due for release Tuesday and no major revisions are expected. The big focus for the euro this week will be the European Central Bank's monetary policy meeting. The ECB is widely expected to keep monetary policy unchanged but with German data weakening and Cyprus requiring a bailout, the ECB could be warming to the idea of additional stimulus. There's a very good chance Mario Draghi will sound more cautious at this week's ECB meeting, which would be negative for the euro. The EUR/USD could drop to fresh year-to-date lows if Draghi even hints that a rate cut is possible. Unfortunately the chance of that happening is extremely likely. The cracks are showing in Germany and Cyprus could be the first of many weaker southern European nations such as Slovenia seeking emergency funding from the ECB. To preempt some of the difficulties, Draghi may want to ease and when the ECB plans to change monetary policy, they usually like to prepare the market for the move by dropping hints early. However if we are wrong and Draghi sounds very calm and unconcerned about the recent deterioration in economic data and the problems in Cyprus and Italy, it could be just what the EUR/USD needs to stage a stronger recovery towards 1.30.

GBP: Looking For Lower PMI
U.K. markets were also closed for trading today but the British pound traded slightly higher against the U.S. dollar following the softer ISM numbers. The latest report on the U.K.'s own manufacturing sector will be released Tuesday along with mortgage approvals, net consumer credit and net lending. We are looking for slower activity given a decline in the sector reported by the Confederation of British Industry. While there have been recent improvements in U.K. data, many investors are eyeing the recovery with caution. If the PMI number surprises to the downside, we could see sterling give up its recent gains quickly. Good data on the other hand could take the GBP/USD up to 1.03.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.