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The end of Golden Week, May Day, and bank holidays has not meant fresh movement for the dollar, which has been confined to narrow ranges against most of the major currencies. The main exception has been the Australian dollar which has been sold to fresh two month lows in response to the RBA's 25 bp rate cut.

The re-opening of Japan's markets saw strong demand for shares, with the Topix rising 3.1% and now, finally, recouping fully the post-Lehman losses. The Nikkei added 3.6% to close above the 14k level for the first time since June 2008. However, the dollar was sold against the yen in Asia, falling to almost JPY98.80 in early dealings. The dollar bulls have been turned back from the JPY99.45 area. The 5- and 20-day moving averages comes in near JPY98.55, and a break of that could spur the cutting of some disappointed dollar longs.

Sterling has been confined to a tighter range against the dollar than the yen, despite two supportive developments. First, the BRC shop price index fell 0.8% in April for a 0.4% gain on a year-over-year basis, the slowest pace in 3 1/2 years. This raises the possibility of lower CPI readings and perhaps greater discretionary spending potential. Second, the auto industry association reported an impressive 14.8% year-over-year rise in April.

This is a continuation of the string of firmer U.K. data, which includes Q1 GDP and PMI readings. While many other European countries are reporting soft data, the UK's firmness stands out. Sterling continues to trade firmly near multi-week highs, the $1.56 area is proving quite formidable. Today it has been confined to yesterday's range, which was within Friday's range (~$1.5480-~$1.5602).

Two sectors illustrate the divergence between the U.S. and Europe. The strength of the U.K. auto sales is an exception in Europe. In the U.S., auto sales rose 13% last year on top of the 8% growth in 2011 and a 12.5% increase in 2010. This has positive knock-on effects for a broad range of industries and was instrumental in the recovery in the manufacturing sector.

We note that the April auto sales reported last week were disappointing at a 14.88 million unit pace, the lowest since last October. This is part of the string of recent data that shows the world's largest economy is slowing. It points to lower retail sales, and in the context of the employment report, it likely means softer manufacturing output.

The illustration of the divergence between the U.S. and Europe is seen in the senior loan officer surveys. The euro area survey, out a couple weeks ago, showed the tightening of conditions. The Fed's report was out Monday and in contrast, indicated that U.S. banks had eased their standards and terms to domestic business and there was stronger demand over several loan categories.

Conditions for households did not change as much, but an increase in demand for credit cards, auto loans and prime mortgages increased. Lastly, for the first time in several quarters, there was no tightening of standards in lending to European counterparts.

The market responded more to a unexpected rise in German manufacturing orders than the large than expected decline in French industrial production. German factory orders rose 2.2% in March following a similar gain in February. The market consensus was for a 0.5% decline. Wednesday, Germany is to report industrial production figures and today's report means that expectations should be increased from the consensus forecast of a 0.1% decline.

Separately, French industrial production fell 0.9% in March, offsetting in full the February increase. Manufacturing output fell 1.0%. The contrast between the two pillars of Europe is likely to grow more stark. France also reported a smaller trade deficit as exports rose (1.4%) and imports fell (1.1%).

The RBA's 25 bp rate cut was immediately greeted by a couple of banks indicating they would pass the cut on in full to the variable rate mortgages. The RBA cited subdued credit demand and the softer global data behind the decision and reiterated that resource investment may peak this year. The central bank clearly kept the door open for another rate cut, but next month is too soon. We now expect the RBA to remain on hold for several months before feeling the need to cut rates again later this year. Depending of course on macro economic developments, our leaning is for the RBA to cut again before the September election.

Source: Full Liquidity Returns, Dollar Yawns