Continued auctions by multiple central banks, and lower-than-expected losses in 1Q2008 earnings from major financial institutions, initiated a relief rally in equities and the forex trading market this past week. Risk aversion dropped and carry trades rose on the widespread belief that the unconventional measures taken by the Fed, ECB, BoE, BoJ, and SNB have eased the liquidity crunch and the worst of the credit crisis now lies in the past.

Although Wednesday 23 April’s release of Australian 1Q2008 CPI data is expected to top 4% y/y, no rate increase is forecast from the RBA, due to lower retail consumption and slower demand growth as previous interest rate hikes begin to bite. The return of the carry trade continued AUD’s four-week advance against the Japanese yen; despite a bumpier ride versus the U.S. dollar, the overall effect was the same, with Wednesday’s 150-pip climb offset by Friday’s 120-pip drop for a slight gain in the week.

The bottom has not yet been reached in the U.S. housing correction; however, the relief in housing costs is counterbalanced by a 36% rise in the retail price of petrol in 1Q2008, not yet reflected in the PPI or CPI readings, which remain modest. The financial markets’ rising confidence begins to discount further significant Fed easing, with forecasts now calling for only a 25bps cut from the next meeting on 30 April.

Very high inflation in the Eurozone continues to rule out any interest rate cuts in the short term, however, both manufacturing and service PMIs are steadily contracting. EUR/USD did break higher, as anticipated, and attempted to crack 1.6000 on both Wednesday and Thursday, succeeding in setting a new high at 1.5983 but falling markedly on Friday back to near the 1.5700 level. The currency pair begins to look rather pricey, and a close below 1.5672 could signal a reversal to below 1.5000.

Last week’s Wall Street Journal article, regarding a BoE plan to remove US$60B of toxic mortgages from lenders’ balance sheets, supported the pound sterling against 13 of the 16 most actively traded currencies. After bouncing off the resistance-turned-support line at approximately 0.7960 and after setting another all-time low on Wednesday 16 April at 0.8099, EUR/GBP rose 1.4% to close Friday at 0.7924.

Against USD, sterling followed a similar path, depreciating the first half of the week then reversing sharply on Wednesday, breaking above the downward sloping trendline drawn off 14 March’s mid-term significant high at 2.0397 (see daily chart below) on Thursday, and closing Friday at 1.9947.

The Bank of Canada meets Tuesday 22 April, and is widely forecast to cut interest rates another 50bps to assist the economy in resisting the U.S. downturn. This past forex trading week, CAD answered both fundamentals (soaring crude oil prices) and technicals (strong resistance level at 1.0300), and strengthened against all of the most actively traded currencies. USD/CAD fell over 275 pips to below parity briefly on Thursday 17 April, before the USD relief rally kicked in and the currency pair entered a short-term consolidation pattern with bullish pressure.

Safe-haven currencies such as the Japanese yen and Swiss franc depreciated markedly. JPY in particular fell against all of the most actively traded currencies, losing 2.6% to USD, 2.8% to EUR, and around 4% to both CAD and GBP.