The better tone in risk was evident from the start of the session on what is the last session of H1. Upside in EUR/USD was mirrored in EUR/JPY and in the AUD and NZD crosses vs both the USD and the JPY. What was a moderately better tone in the EUR turned into a surge on the results of the ECB’s money market operations. EUR/USD leapt to EUR 1.22665 on the publication of the results and continuing to drift higher into the US open. Today’s 3 mth allocation of funds coincided with the expiry of last year ‘s EUR442 bln 12 mth loan sparking speculation that demand for funds would be huge. In the event the ECB allotted a smaller than expected EUR 131.9 bln in 3mth 1% loans to 171 bidders. The fact that demand for funds was more modest than expected was taken by the market as suggesting that funding difficulties in the European banking sector were not as bad as had been feared. That said financial institutions have had a long time to prepare from the expiry of the 12 mth loan and EUR 131.9 bln is still a considerable amount. It remains probable that some banks are having difficulties funding themselves in the open market and tension in the money market is likely to remain until greater transparency makes clear how great the exposure to non-performing loans is within European banks and more pertinently which organisations are most at risk.

EUR/CHF has been able to track the move higher in EUR/USD this morning breaking what has been a very dominating downtrend. The improvement in Swiss economic fundamentals continued with the release of another rise in the Swiss KOF leading indicators. Fundamentals will continue to underpin the outlook for the CHF but the currency has also been subjected to safe haven inflows this year and this morning’s better tone with respect to risk has undermined the CHF today. The unwinding of some of the recent sharp losses in the Romanian leu this morning on the news that the IMF will discuss Romania’s progress in meeting the terms of its bailout loan has soothed fears that the country could be at the brink of default.

The better tone of the EUR this morning has also pushed EUR/GBP higher. The release of the final UK Q1 GDP data which had been scheduled for today was postponed by the Office of National Statistics until July 12 on the premise that Quality Control had flagged scope for error in some of the detail. UK markets still had the releases of weaker than expected Gfk consumer confidence survey and the Nationwide house price survey to focus on. Confidence could be affected further in the coming months as fiscal austerity bites. The housing market appears to have been hit by the additional constraints of more supply and possibly the recent better tone of the pound. Softer data do threaten to curtail the outlook for the pound over the coming months. That said, in the post budget environment with the threat of a UK credit ratings downgrade lifted and with banking concerns likely to continue to weigh on the EUR, EUR/GBP may regain its recent bias lower.

Australian housing data release overnight showed a softening in activity. House prices decelerated while new home sales in May dropped by -6.4% m/m. Coincidentally, jobs available for skilled workers fell 0.3% m/m in June. Offsetting these numbers were data showing stronger than expected growth in private sector credit (+0.5% m/m). On balance there appears to be sufficient evidence to suggest that the RBA’s action on rates is taking effect and for the central bank to hold fire for some months now. AUD/USD has edged higher this morning in line with the better tone in risk, but it could struggle to regain its recent highs.

The ECB Trichet is due to speak today. US ADP employment change, Chicago PMI and ADP employment data are due.