After the recent extreme volatility, markets are starting this week with a steadier tone. The Swiss franc, though, has dropped to a two week low against both the dollar and euro. Markets are cautious that the SNB will take further action to weaken the currency with increased speculation over the weekend about a possible peg to the euro. Some improvement in risk appetite and the steadying in markets is also eroding some of the Swiss franc’s safe haven appeal.

The improvement in risk appetite is also weighing on the yen. Japanese shares rallied strongly on the overnight news that the Japanese economy contracted by much less than had been anticipated in the first second quarter of the year. Despite the impact of the earthquake and tsunami, GDP growth declined by only 0.3% in the quarter. Meanwhile, the Japanese government has again warned of the dangers to the economy of the strong yen and that it remains ready to act against any rapid yen rises.

Meantime, despite the very volatile week on forex markets, dollar/euro remains locked within familiar territory. The dollar, though, will be looking for indications about the strength of the US economy, with the August Empire State index and NAHB house builders’ sentiment index on today’s calendar. Meanwhile, in the euro zone, today’s calendar is clear with markets focusing on tomorrow’s key meeting between Sarkozy and Merkel. Sterling was generally sidelined last week and has been sticking to recent ranges against both the dollar and the euro. While the overnight news from Right move was disappointing, with house price showing their first year-on-year fall since 2009, this is unlikely to force any break of these ranges.