The US dollar basically traded sideways overnight with EURUSD in a 1.5522 to 1.5603 range, while USDJPY traded in a 107.80 to 108.34 range. The S&P500 rose by 1.7%, while 2-year Treasury yields fell by 2bp to 2.6%. The big mover was oil, which rose by $4.7/bbl to close $126.9/bbl and intra-day movements in EURUSD were correlated. Despite last night's blip in oil, growing evidence of a slowing global economy could keep energy markets under pressure for now.

The ADP reported that employment actually rose by 9k in the private sector in July against expectations of a decline of 60k and supported by jobs growth in the services sector and hiring by small businesses. Note that the ADP has tended to overstate payrolls in the last few months, and our economists still look for a decline of 75k in Friday's payrolls.

Today, our economists are looking for Q2 GDP to show a weak but still positive growth rate (1% annualised). The market is more positive and is looking for a 2.3% annualised rate. Note along with the Q2 data, the BEA will also publish its revisions covering Q105 through Q108. In other reports, claims are also due along employment cost index, which should show ongoing moderation. Over 3 months we expect slowing global growth and lower oil prices to force central banks in Europe and else where to cut rates. Meanwhile, the Fed is already positioned for slower growth and hence such a development should ultimately support the US dollar.

Ahead today, and in addition to GDP, the employment cost index and jobless claims are due at the same time of 1230 GMT. The Chicago PMI is due at 1345 GMT.

The KoF leading indicator released yesterday came in at 0.90, well below expectations of 0.95 and finally breaching the key 1 barrier. However, the market's responses have been muted after significant weakness in CHF yesterday on the back of better risk appetite. Other Swiss numbers have shown some resilience, with the unemployment rate and PMI readings faring better than its European peers. Nevertheless, risk aversion is driving the CHF at present and recent rounds of risk aversion have failed to benefit the currency. Yesterday's rebound in equity markets will likely pressure the franc further. Our risk index has gradually trailed back towards risk-seeking territory as offsetting attitudes towards risk in different markets have ensured general stability on an aggregated basis and this is clearly not conducive for franc strength. We have revised our EURCHF forecasts higher and now target the cross at 1.63 in 1m and 1.60 in 3m.

All major confidence surveys released yesterday in the Eurozone surprised significantly to the downside. The business climate indicator dropped to -0.21 vs. cons. -0.02 (0.14 prev.), the consumer confidence indicator feel to -20 vs. expectations of -18; and the economic, industrial and services confidence indices all fell sharply. New records are being set on a weekly basis in economic sentiment indices and it would be difficult for the ECB to ignore these across-the-board declines. Commentary remains muted ahead of next week's interest decision and we believe the time to begin contemplating making a trade-off between growth and inflation is approaching. Economic deterioration has accelerated since Trichet last professed his "no bias" position but this cannot be sustained under current conditions. The euro's exposure to any re-pricing in ECB expectations, but inflation would need signs of peaking before any correction materialises. We remain short EURGBP as a trade recommendation.

Industrial production for June released this morning fell 2% m/m vs expectations of -1.7% m/m (prior +2.8%). The Japanese government has cut its outlook for industrial output, acknowledging the sector is weakening as surveys show further signs of decline up ahead. The figures are also consistent with recent export data which showed a global slowdown in demand for Japanese goods, with shipments to the US and Eurozone falling double-digits on an annualised basis. Coupled with growing resilience in risk aversion Japanese retail investors have maintained solid demand for the carry trade, even as currencies in the commodity bloc show signs of strain in the face of weakening global demand. We remain cautious on the potential for these fresh positions and still target USDJPY at 105 in 1m and 3m.

RBNZ Governor Bollard spoke yesterday on the subject of inflation targeting, arguing that the policy has served New Zealand well. More interestingly he said that he sees 'plenty of room' for rates to fall further. While the RBNZ has already signalled that rates will come lower, Bollard's comments today are the most explicit reference yet to the possibility of a sequential lowering of rates. Meanwhile, we note that the major news wires were reporting that Japanese margin traders extended their already very long NZD positions. It's a case of the Japanese margin trader versus the rest of the world, as most investors outside of Japan are shy of NZD given the slowing economy and the need for lower rates. We think macro forces will win and at some point Japanese long NZD positions will need washing out, driving further NZD weakness. We target AUDNZD at 1.31 and 1.33 over 1 and 3 months respectively. In Australia, building approvals fell slightly, providing further evidence that the economy is slowing. However, investors should not forget the substantial FDI flows from China that the AUD is likely to benefit from over this year.

Higher oil prices and improving risk appetite could drive a lower USDCAD, which is looking vulnerable at current levels. On Wednesday, Canadian industrial product prices rose by 1.3% m/m in June (consensus and UBSe +1.0% m/m). As expected, soaring petroleum and coal product prices (+6.1%m/m) were largely responsible for the monthly rise in the index. The IPPI is now up 5.4%y/y in June, the highest rate since October 2004, but this increase is solely due to petroleum and coal product prices. Ahead today, GDP for May is due and the market is looking for a 0.2% monthly rise following 0.4% in April. We expect the BoC to stay on hold for now.