EUR/USD is dithering in a 1.3520/1.3560 range this morning awaiting further developments in the Greek aid story. The letter written by Greek PM Papandreou to EU Institutions and the IMF yesterday and his comments today that we are making all the preparatory moves to activate the loans on offer suggest that Greek is on the brink of throwing in the towel and admitting that it cannot continue to fund its debt at the rates that the market is demanding. While there is an Ecofin meeting today comments from Eurogroup President Juncker suggest that Greece is not on the main agenda. That said, it seems increasingly inevitable that Greece will use loans from the EU and/or the IMF to avert a funding crisis and that some clarification of that position will be announced over the next few days. For the Greek population and the markets alike an important aspect of any IMF involvement will be the terms attached to any loan. The Greek press is reporting that social security reform could result in a 30% reduction in pensions and an increase in the retirement age to 65. Insofar as Germany increased its retirement age from 65 to 67 in 2007, these headlines are unlikely to garner much sympathy from the EU's largest creditor nation. While news of budgetary reform should be met with relief by the markets (the 10 yr Greek-Bund spread is little changed from yesterday morning), fears that the IMF may instigate a restructuring of debt and could potentially promote a devaluation in the currency (in this case a move out of EMU) will keep the markets nervous. News that March Eurozone CPI registered a softer than expected 1.4% y/y will promote the view that ECB rates will remain on hold well into 2011; a factor which could weigh on the EUR medium term.

Insofar as the leader of the UK's third biggest political party has never before demanded a share of the limelight equal to that of two front running parties, the leader of the Lib Dem party was always going to have more to gain from last night historic televised debate between the leaders of the three main political parties. For the markets, however, the more important aspect of the debate was whether it could increase the lead of the more market friendly Tory party over Labour. At present opinion polls continue to point to a hung parliament with sterling falling back overnight on the inability of The Tory leader Cameron to take a defining lead in last night's debate. Cable, however, has benefitted from a slightly weaker USD this morning finding buyers near USD1.5370. There were no UK data released this morning.

Risk appetite has recovered in European hours. News from the US yesterday was generally positive; earnings and better TIC data soothed the mood. By contrast calls from the Chinese Banking Regulatory Commission for more prudent management of property loans has sparked another wave of Chinese policy tightening fears pushing Asian stocks and risk appetite lower. This has supported the JPY. That said the unchanged assessment of the economy from the Japanese government suggests further pressure on the BoJ for action on deflation could be in the offing. This would support a medium-term trend of JPY depreciation.

Canadian vehicle sales and US housing starts and the University of Michigan confidence index are due overnight.

Jane Foley
Research Director
+44 207 398 5024