The US dollar traded firmer overnight on broad-based strength, with EURUSD trading from a high of 1.5483 down to a low of 1.5398, while USDJPY traded up to a high of 109.88 from a low of 108.30. Equity markets finished higher on Wednesday, with the S&P 500 up by 0.3%, while 2 and 10-year Treasury yields rose by 1 and 3bp respectively. Crude oil futures touched a low of US$117.11/bbl - a level not seen since early May - partly due to data from EIA showing inventories rose more than expected, pointing to falling demand. Economic data overnight was fairly light. The Mortgage Bankers Association reported that mortgage applications rose 2.8% in week ending Aug 1 on back of refinancing applications that jumped 4.4%. Our economists note however that the mortgage applications index has not had a very strong relationship with actual home data. Finally, a major US bank informed some of its customers this week that they won't be allowed to withdraw money on their home-equity credit lines due to falling home prices. The development is consistent with a further weakening in the economy and is another example of the linkages between the credit crunch, the housing market and aggregate demand in the economy. The main event this week remains the ECB President Trichet's press conference today following the ECB rate decision. While we expect the ECB to keep rates on hold, it will be interesting to see what he makes of the decline in oil prices combined with evidence of a weakening Eurozone economy and its implications for the Eurozone inflation outlook.

Ahead today in the US session, jobless claims are due at 1230 GMT, while pending home sales for June are due at 1400 GMT.

German factory orders came in weaker than expected (-2.9% m/m, -0.9% previously), indicating that economic difficulty has become too widespread for the ECB governing council to ignore. Futures moved up slightly on the German economic data, but our view is still that the ECB will keep rates on hold, and the press conference will be scrutinized for any possible hints of a September rate hike. The price of oil, impacting rate expectations and hence the euro, has now fallen almost 30$/bbl from July highs but the Governing Council may decide that more time is needed before a peak in inflation can be confirmed. ECB comments have been in short supply of late but isolated reports suggest that the ECB may not wish to sound too aggressive on inflation at today's meeting, but even doing so would undermine the EUR to a certain extent as weaker rates are priced in.

The Ivey Purchasing Managers Index came in at 65.5 vs expectations of 61.0 (69.6 previously). Given its volatility, our economists are not focusing on the index alone. More importantly, the unemployment rate, due on Friday is expected to stay steady at 6.2% while the net change in employment is expected to be +5K, following a decline of 5K. With oil having come off recently and economic data continuing to disappoint, economic weakness looks to become the primary concern for the BoC. Softer than expected data should not weaken the CAD significantly, as the focus on the weak economy seems to be priced in currently. The market views the BoC in a neutral-to-easing mode. Our 3-month USDCAD forecast stays at 1.0200.

In data released yesterday home loan approvals fell 3.7% in June, weaker than expectations of 2.0%. However, our economists note that the value of lending across investors and owner-occupiers (ex refis) fell 0.5% in June, their 'best' performance in 5 months, with the prior 4 months averaging a decline of 5.8% per month. The annualised pace is now at -30.4%, the weakest on records. Lending for new construction also fell further by 2.9%, pointing to further weakness for building approvals. Our economists note that although data was weak, it is consistent with the tight credit tightening environment as a result of earlier rate hikes. The slowing housing market will continue to affect the wider economy in terms of demand, but our economists believe that today's result may be an early sign of a trough in lending data, but this will not alter the moderation in growth envisaged up ahead. We look for 100bp rates by mid-2009, but the market has now aggressively priced in multiple cuts by year-end and this is weighing on the AUD. In NZ this morning, HLFS employment rose by 1.2% q/q against market expectations of a decline of 0.1% q/q, while the unemployment rate crept up to 3.9% versus market expectations of 3.8%. We continue to look for the RBNZ to cut rates in September.