The German Ifo index was better than expected across the business climate, current assessment and expectations segments. The Ifo said the pace of the economic meltdown is slowing as shown by the current assessment figure at 83.6 versus expectations of 82.1. The expectations component went up for the fourth time in a row. The Ifo institute usually says that it takes three consecutive increases in the headline index to confirm a turnaround, but the expectations component is the one which is statistically more significant as a leading indicator for GDP growth. This is why our economists think it important that it continued to improve in April and read this as an important signal that the Ifo index is indeed stabilising. But even as recent PMI data point to some stabilisation across the Eurozone, German Finance Minister Steinbrueck noted that "the downward dynamic still isn't being stopped" in the German economy and forecast that a GDP contraction in Germany of 5% for 2009 was "not unlikely". Meanwhile, Bundesbank Chairman Axel Weber noted that tensions in the interbank market are easing and he sees an economic recovery in 2010. However, he maintained a hawkish view on rates and said that expansive policies must be "scaled back" once the crisis was over. His view on a 1% floor for rates remains unchanged but the market is now looking to the set of unconventional measures which Governing Council Members have pledged to released up ahead. The EU's Almunia also said that it would not be politically acceptable for a Eurozone country to ask the IMF for help and said they would find other solutions, should risks materialize. Almunia sees some positive signals in the European economy and said European inflation could turn positive in the second half of the year with no high risk of deflation. The EUR may trade heavy today if risk aversion resurfaces. In Switzerland, the ZEW survey showed a remarkable improvement at -27.7 (prev. -57.1), though it still remains deep in negative territory. The SNB continues to stick to its policy of currency intervention while it waits to see the effects of its initial efforts.

Media outlets reported that the Japan Financial Services Authority will impose caps on leverage employed by FX margin traders. The reported noted that trades involving leverage of around 100 to 600 times collateral have been increasing, and the FSA is looking to limit this to 20 to 30 times collateral. We believe on the margins this will be negative for the AUD and NZD, but at present risk-reward is rather limited in the carry trade and the prospect of further cuts in Australia and New Zealand will cap demand further. In recent weeks, Japanese margin traders have been increasing their short yen positions in aggregate, although they have declined over the past few days. Un-leveraged outflows from Japan (as proxied by investment trust outflows) should remain ongoing while investment opportunities in Japan are limited.

In Pro Traders Club we have considered to readjust our USDCAD forecast and reduce the level of the range. The BoC outlined a framework for unconventional policies as the official rate is expected to be near zero until mid-2010 and the global slowdown continues to affect Canada. Additional monetary stimulus could come from quantitative easing and/or credit easing. They defined quantitative easing as the creation of central bank reserves to purchase financial assets and credit easing as outright purchases of private sector assets. The BoC said it would announce quantitative easing on rate-setting dates, unless conditions materially deteriorate. Credit conditions are improving for now, though it is still soon to say conditions have fully normalised. BoC's Carney said the need to do any extraordinary easing would constitute "a big if" and any easing would be principled and deliberate. Meanwhile, data is expected to remain weak for the next six months and Finance Minister Flaherty said Canada would have significant unemployment in 2009. USDCAD dropped on the back of the announcement, as investors appeared to be expecting immediate quantitative or credit easing. But Flaherty will reported release the next budget update earlier than expected in September. Flaherty said the recent downward revision of BoC projections did not necessarily mean more stimulus would be needed but reports suggest the next budget update could contain some additional measures. We adjust our USDCAD forecasts to 1.25 in 1m and 3m following the BoC's decision to outline a framework for, but not implement, non-conventional policies. Barring a further significant deterioration in the global slowdown, the BoC appears to be willing to hold off of non-conventional policies and we think USDCAD could range around our forecasts as the global growth picture remains muddled.

GBP: Ratings risk
In economic data, the Q1 flash estimate of GDP was worse than expected at -1.9% q/q versus expectations of -1.5% q/q, which would be the lowest q/q growth rate since Q3 1979. Annualized GDP would be -4.1% based off of the current estimate. Retail sales were better than expected at 0.3% m/m for March. But the retail sales data is volatile and the worse than expected Q1 GDP data points to downside risk for current forecasts. The Daily Telegraph reports today that Moody's and the S&P are reviewing the ratings of the UK in light of the budget and there is a risk that the UK will lose its AAA-rating. Although the agencies themselves have yet to comment publicly, ratings action was always going to be a risk in light of the borrowing levels mentioned in the budget and sterling may face pressure as a result. The market may find it difficult to absorb the massive increase in gilt issuance and the BoE may be forced to extend its asset purchase facility as a result to ensure borrowing costs do not rise excessively. Our economists expect the BoE to be the largest holder of gilts up ahead, but questions will also be asked of the UK's long-term fiscal health, as the FT noted the country's debt-to-GDP ratio is set to remain above 40% for a significant periord of time. Nevertheless, all governments are facing fiscal pressures up ahead and it's important not to view the UK's position in isolation. The ECB's warnings about multiple countries breaking the stability pact is also damaging for the EUR while debt levels in the US are also set to rise sharply. We continue to see EURGBP at 0.89 in 1m and 0.86 in 3m.

Source: UBS Research, ANZ, Bloomberg, Chris Lori CTA