Greek bond holders have taken some comfort from the weekend's EUR110 bln bail out, the EUR has not.  Greek 10 yr yields are holding significantly below Friday's levels and have outperformed Spanish and Portuguese paper this morning.  The bailout is significantly higher than the EUR 45 bln EU/IMF loans that were on the table just a few weeks ago.  It overwhelms Greece's funding requirement for this year and thus further delays any risk of default from Greece.  It does not, however, fix Greece's fiscal problems and it certainly does nothing to offset the issues in Portugal or Spain.  Portugal has been planning to issue during Q2, if  yields carry on rising it may have to concede that it too can no longer afford to raise funds on the open market.  In these circumstances, it too would be looking for an EU/IMF loan.  This would force EMU officials to address the question as to how far they are willing to bend their own rules to maintain the semblance of coherence within EMU.  The ECB has now suspended the minimum credit rating for Greek government bonds used as collateral in liquidity operations.  This would reduce the impact on Greece of another further credit ratings downgrade.  However, is also recognises the risk of further downgrades which it is an acceptance of the fact that Greece budget reform is a mammoth task.  Faced with a fixed exchange rate, recessionary conditions and widespread public protests there are no guarantees that the Greek government can succeed in making the sending cut that are necessary as part of the terms of the loans offered to it.  It is thus still too early to rule out eventual default or devaluation from Greece.   The sharp decline in Greek bank deposits in recent months reflects that devaluation risk is being hedged by domestic savers.  The EUR has continued to decline this morning reaching an intraday low of EUR/USD1.3118.  EUR/USD closed the month of April below its monthly cloud suggesting a weakening in the technical outlook.  

Cable has spent most of the morning pushing lower.  Although UK Apr PMI manufacturing was better than expected at 58.0, soft UK lending data and M4 numbers this morning did not help sentiment.  The real focus of attention lies with the general election on Thursday.  Opinion polls continue to point to a hung parliament and the prospect that this may lead to a protracted period of coalition negations which may delay the task of deficit reduction would not be a favourable one for the pound.  The best case scenario for sterling would be the return of a majority government this week.  As expected the RBA announced a 25 bp rate hike this morning, the sixth rate hike since Oct.  Insofar as it coincided with comments from the RBA that borrowing costs had returned to average levels, the outlook for the AUD was sapped and USD/USD pushed lower to 0.9174 this morning.

Golden week in Japan is likely to stem volumes in the yen this week.  The failure of USD/JPY to close above its weekly cloud at 94.30 last week has stemmed some enthusiasm with respect to to upside potential in USD/JPY.  Demand for safe haven in the wake of events surrounding EMU could continue to support yen so further gains in USD/JPY could be indicative of an emergence of broadly more positive tone in the USD.  

US factory orders and pending new homes sales are due this afternoon.  Geithner is due to testify.

 Jane FoleyResearch 207 398 5024