Traders dump the USD on U.S.-China trade tensions

- The Shanghai Securities News, one of China's leading business newspapers published by the state-run Xinhua News Agency, reported that China's new forex investment company needs annual returns of 10% or more in order to cover its costs. The required return is significantly ahead of the 4% earned by China on their forex reserves during 2006, and means that the forex investment fund is unlikely to invest heavily in US Treasuries. The Shanghai Securities News did not cite its sources. The story comes amid increasing trade tensions between the U.S. and China, after the U.S. said it would file two cases in the WTO against China aimed at piracy and counterfeiting of U.S. media and books. Traders dumped the USD on the back of these developments. The AUD/USD moved to the highest level since 1990, the EUR/USD moved above 1.34 and USD/CHF moved down to 1.22. July fed funds contracts are pricing in a 8% probability of a rate cut to 5% at the June 27-28 FOMC meeting, while Sept contract are pricing in a 64% probability for a Q2 Fed rate cut to 5%.

- Kiwi data confirms still-extreme capacity constraints and uncomfortably high inflationary pressures: (NZ Q1 NZIER Business Opinion Survey: -15 v 3 prior; Q2 trading outlook 16 from 15 prior). The NZIER survey showed Q1 NZ Capacity Utilization was 91.8% vs. 91.71% in prior quarter, a development that is likely to reinforce idea that RBNZ still has some work to do. In a survey of 14 economists, 5 said that they see a NZ rate hike on April 26 while 9 said that they expect rates to remain unchanged for the remainder of the year.

- Aussie construction data points to an improvement in activity in coming months: (AU March AiG Performance of Construction Index: 51.1 v 51.7 prior) The Aussie construction industry is continuing to add jobs, but at a slower pace (employment index dropped 3.9 points in March to 51.3, above the 50 expansion/contraction divide). The data showed an increase in new orders, pointing to an improvement in activity in coming months. AiG added that if construction growth is to continue Aussie rates would need to be kept on hold.

- Chinese end-March M2 money supply slows down slightly, but remain at elevated levels: (CH China-end March M2 money supply up 17.3% y/y v 17.5% expected by analysts). In February China's M2 money supply climbed by 17.8%, and in January M2 money supply increased by 15.9%. (Note: This data has been leaked and still needs to be confirmed)

- Aussie businesses are worried about the state of the U.S. economy: (AU Mar NAB Business Confidence: 10 v 12 prior; Conditions: 17 v 18 prior). The NAB survey found that the real cause for concern among Australian companies is the outlook for the U.S. economy. Aussie homebuilder Rinker, with a significant exposure to U.S. housing market, reaffirmed guidance but said that they expect EPS to be at the bottom of their previously guided range. In other Aussie economic data, tight labor market conditions are expected to continue. According to a private survey, the number of job advertisements in major metropolitan newspapers rose a seasonally adjusted 2.0% in March, after a 2.6% drop in February.

- Forex: The Japanese Ministry of Finance reiterated that they don't think the G7 meeting is to highlight the weak Yen. The Singapore dollar hit a 9.5yr high after stronger-than-expected GDP data and the central bank saying that they are to keep a modest and gradual appreciation stance on the Singapore dollar.

- Equities: Most Asian equities are in negative territory as U.S. equities ignored a sharp increase in March's non-farm payrolls. After rising sharply during the prior session, the Nikkei 225 is lower by more than 0.50% as recent gainers saw profit-taking ahead of earnings season. Australia's ASX 200 index hit record levels on M&A expectations and higher copper prices. Gains on the ASX 200 were led by Rinker, Coles Group and BHP. The Kospi gave back gains as Merrill Lynch cut Samsung's 2007 EPS estimate.

- Commodities: Crude oil and gold are higher in Asian trading after falling sharply during the U.S. session. Traders cite expectations for increasing gasoline demand for the rise in crude, while spot gold is higher on USD weakness. Shanghai copper rose by its daily limit for the 2nd consecutive session on increasing seasonal demand and short covering. Shanghai copper is near a 6-month high ahead of this week's release of China's monthly trade balance.