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Short Euro: Since late Jan, the record net short euro futures position was scaled back and as of last Tuesday was at its lowest level in about 20 weeks. This was partly a function of shorts being pared and partly longs being established. As a proxy for trend followers and momentum players, we suspect that market segment is now better balanced to allow for a new leg down.

We have been focusing on the flare up of tensions in Spain and Italy. This is not only the waning impact of the LTROs, but also not country-level developments. Spanish bonds have been under pressures since Rajoy's fiscal miscues and Italian bond yields have been rising since Monti touched the "third rail" of Italian politics by proposing modifications of the infamous Article 18 that ossified Italy's labor market around 40 years ago.

While the economic/policy backdrop appears to be deteriorating, we are just as concerned about politics. Here, the French elections are first. The latest polls show Hollande still beating Sarkozy in the crucial second round. The first round appears tighter. Sarkozy's first campaign was as the French version of Thatcher, but now he is running seemingly as the reincarnation of De Gaulle arguing for more protection for European businesses and tighter border controls. Hollande seems like an unreconstructed socialist, resisting any liberalization, advocating an unwind of the increase in the retirement age, higher tax on the wealthy, and a renegotiation of the newly signed fiscal compact.

As the market begins to focus on the French elections, the euro is likely to trade heavily and gradually absorb the bid that are protecting the lower end of the range in the $1.2970-$1.3000 area. We anticipate support to give way and for the euro to finish Q2 near $1.27.

Long Yen: The net short yen futures position is near the largest since the financial crisis first erupted in H2 07. The BOJ's anticipated expansion of its asset purchases program in the middle of February, coupled with the impact of the ECB's LTROs and stronger data from the US prompted the reversal of the speculative positions and encouraged Japanese investors to step up their purchases of foreign assets, while foreigners slowed their purchases of Japanese assets.

The renewed pressures in the euro zone, the narrowing of interest rate differentials, and the heavier tone to the Nikkei will likely see the trend higher. Japan also has its own political pressure mounting as Noda continues to insist on pressing for the retail sales tax hike. This is the "third rail" of Japanese politics and it could very well lead to his political demise. Noda would not be the first Japanese prime minister to be toppled over the retail sales tax.

However, and herein lies the kernel of truth about Japan's so-called safe haven status. During global tensions, or particularly daunting domestic problems the yen strengthens as Japanese households are less willing to recycle the current account surplus.

In the coming weeks, the dollar can fall back to the JPY78-79 area. More broadly we look for the euro to fall toward JPY102-JPY103. The Australian dollar can fall toward JPY80.

Some participants are worried about the impact of new asset purchases, perhaps later this month, on this bullish yen call. We would point out that the BOJ has been engaged in QE for years and rarely has it coincided with a depreciation of the yen. We suspect the impact of the LTRO may have been a greater weight on the yen more recently than the mid-Feb QE extension.

Long Norway/Short Sweden: Following the more aggressive than expected easing by the Norges Bank, NOK fell almost 4% against SEK since March. That moves appears over and the fundamentals appear to be swinging back in Norway's favor. Earlier today, Sweden reported a horrific February industrial production data and this has on the margins increased the risk that the Riksbank eases next week (April 18). The consensus was for a 0.3% decline after the outsized 3.6% increase in January. Instead, Sweden reported a 5.2% contraction on the month and the Jan series was shaved to 3.3%.

Forward looking industrial orders fell 5.5% and is the seventh decline in 9 months. That said, on balance, we think the Riksbank will not cut rates until the economic picture is clearer In contrast, Norway reported higher than expected March CPI figures with the year-over-year underlying rate rising to 1.5% from 1.3%, which is the highest since last May. The risk is that Norway has to reverse the 75 bp in cuts delivered between late Q411 and end of Q1 12. We envision NOK recovering toward SEK1.190-SEK1.20.

Short Swiss Francs: The SNB has been secured the cap on the franc at little cost and even though the cost may be rising, we think it is too early to fight it. Investors should consider using the Swiss franc as a funding currency and/or the short leg of cross positions. Switzerland sold a 6-month bill today with a negative yield of 25 bp. Its 2-year yield is -3 bp.

While some central banks may be tempted to lay a trap by allowing the currency to do beyond the cap and then snap it back, with the goal of burning the speculators fingers (or more) for daring to challenge officials. However, the SNB's statement today indicates that that is not it's modus operandi.