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Late afternoon and overnight the USD weakened across the markets as US GDP data came in better than expected. The US economy shrank at an annualised rate of 5.5% in the first quarter of 2009; this was better than the expected contraction of a 5.7% decline. The data raises hopes that the economy has reached a bottom and that Q2 data will show further improvement in GDP. The USD was initially performing strongly in trading yesterday as news that initial jobless claims had risen unexpectedly by 15,000 last week- this led to sentiment to lean towards caution especially given the Feds lack of clarity on future moves in their policy meeting. During the afternoon the USD experienced a sustained sell off against the majors with GBP/USD pushing up from technical support at 1.6250 to a high of 1.6499 in early trading, EUR/USD has also again pushed through the 1.40 level to sit at 1.4045 currently. US equities jumped higher with the S&P 500 up 2.1%, this carried through to Asia with the Nikkei climbing 2.2%- the gain in equities mirroring the improved sentiment following the GDP data. Another reason for USD weakness can be attributed to the vies that interest rates in the US will remain low for a considerable time- there was an expectation for a rate hike in early 2010 but the recent comments from the Fed suggest not. Looking at interest rates the early view on major economies is that a hike will be seen first by the Reserve Bank of Australia and then by the Bank of England- yield remains a key driver for currencies and the AUD and the pound could gain if this view permeates to the markets.

The economy in New Zealand continues to disappoint with GDP data coming in at -2.7% against expectations of -2.3%. This is now the fifth consecutive quarter of contraction for the economy and demonstrates the theme of an export driven economy experiencing more pain in the global slowdown. The same story can be said of Germany; in fact the German finance minister Peer Steinbruck told the BBC that Germany must reduce its dependence on foreign trade. The problem is twofold for Germany and New Zealand in that the fall in demand has been coupled with a significant strengthening of the currency which further dampens the demand.

We expect another volatile day in the markets as sterling targets the technical high of 1.66 on the USD and the EUR aims to breach 1.41. Same theme elsewhere in the fact that the AUD, ZAR and NZD have firmed up on the increased appetite. Keep an eye on the Swiss Franc as further intervention could occur if the CHF starts to strengthen against the USD or the EUR.

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