The dollar was broadly stable on Friday as non-farm payrolls were not materially different from expectations. EURUSD traded in a 1.5514 to 1.5590 range, while USDJPY traded down to a low of 107.28 from a high of 107.78. Equity markets finished lower on Friday, with the S&P 500 declining 0.6%, while Treasury yields were little changed, with 2-year and 10-year yields down 1bp to 2.51% and 3.94%, respectively. Oil rose on Friday by US$1.02/bbl to US$125.1on ongoing Israel-Iran tensions and also less production from Nigeria due to militant attacks. Non-farm payrolls fell by 51k in July, not as bad as the 75k decline expected by the market, but enough to see the unemployment rate push higher by 0.2 points to 5.7%. Manufacturing ISM for July fell marginally to 50.0 from 50.2, although the detail were more negative, with total orders falling to 45.0 from 49.6, while export orders slipped to 540.0 from 58.5.

This week the Fed decides on rates as do the RBA, BoE and ECB. Of particular interest will be ECB President Trichet's comments following the soft run of data in the Eurozone and given lower oil prices. A less hawkish tone by Trichet could help push EURUSD lower within its ranges. The market will pay close attention to the RBA following a local press report on Friday that the bank is close to cutting rates. The increased possibility of rate cuts by central banks other than the Fed could propel a stronger dollar on a multi-month basis and maybe in the short term, should global growth indicators deteriorate further. Note that China's PMI for July was released on Friday and fell sharply to 48.5 from 52.0 in June, further adding to negative sentiment on global growth.

Ahead today, economic data of note in the US is limited to personal income for June at 1230 GMT. The markets may pay attention to the personal consumption deflator contained in the report.

Japanese Prime Minister Yasuo Fukuda rolled out his anticipated cabinet re-shuffle and appointed former education minister Bunmei Ibuki as the new finance minister. Koaru Yosano, previous secretary general of the LDP, has been appointed as the new economics minister. Both ministers favour raising the consumption tax to boost Japan's fiscal position. In his first comments as finance minister, Ibuki said that the Japanese economy is in a severe condition and he will consider a consumption tax hike in a 2-3 year range. Yosano said Japan's economy may have entered a downturn in the economic cycle last year. In the short term, the sharp drop in exports and consecutive weeks of weak economic releases will be a government priority. The JPY is currently under selling pressure from risk appetite and gains in carry positioning but we question whether these trends are sustainable, especially as talk of rate cuts in high-yielding countries continues to grow louder.

Final July manufacturing PMIs were released for Italy, France, Germany and the Eurozone. Only German PMI managed to satisfy expectations, showing a slight expansion of 50.9. All other results showed contractions and disappointed expectations. The EUR fell last week after a Reuters report citing anonymous sources warned that the Eurozone economy may contract in Q2, but as inflation may be at peak and ease ahead due to lower oil prices. However, the sources also warned that the ECB is still maintaining inflation as its key focus and inflation expectations pick up again, the central bank would raise interest rates again, even if the economy were contracting. Nevertheless the official cited another hike is unlikely before September because the economy is already weakening. Despite hawkish elements contained within the report, released on the back of the Eurozone CPI release which came in higher at 4.1%, the market chose to focus on downside risks for the Eurozone, and it is becoming increasingly clear that the ECB is now more attentive to downside risks. This week's interest rate decision will be crucial for ECB rate expectations and we believe it will be very difficult for Trichet to continue his "no bias" position. Data has been very weak over the past month and the decline in oil prices has contributed to some easing in inflation expectations. The ECB may feel that a further hike will be necessary to decisively contain price pressures but this may come at a great cost to the economy and even undermine the ECB. The EUR will continue to face data and ECB-related downside risks up ahead and we are still short EURGBP as a trade recommendation.

Manufacturing PMI for June was 44.3 versus expectations of 45.5 and down from 45.8 in June. The headline index and the new orders index are both the weakest in almost 10 years and the employment reading is also the lowest since December 2001. However, the input and output price readings are the strongest since the series began. Our economists note that the manufacturing sector is now in a recession due the dramatic slowdown, and a drop in the services balance may point to a Q3 recession. Oil prices continue to drive input prices higher but the declines in crude towards month-end should help contain inflation expectations. The MPC meets this week and our economists note that because the meeting will be held against the backdrop of the quarterly inflation report deliberations, there is a possibility of a surprise decision. We expect rates to remain on hold. In other news, government figures showed company liquidations in England and Wales in Q2 were up 11.6%y/y, 15%y/y, while personal insolvencies dropped 2%.

Swedish GDP for Q2 was flat q/q against expectations of a rise of 0.3% q/q. The release comes on the back of a series of downside surprises for the economy and our economists note that although the growth figure may be revised upwards, Swedish growth may even disappoint our below-consensus forecast of 1.9%y/y growth in 2008. The Riskbank's previous outlook has been challenged both internally and externally, and at present downside growth risks may already be too great to ignore and this raises doubts about the MBP's ability to raise rates according to their pre-announced projections. We expect one more hike. In Norway, the AKU unemployment rate came in at 2.5%, in-line with expectations but last month's figure was revised downwards to 2.4%. We remain cautious on the outlook for NOK and SEK, but EUR weakness remains an offsetting factor.