The EUR has pushed higher this morning through the EUR/USD1.2350 area to an intraday high of 1.2394. Relief that Spain has again been able to raise funds on the open market is helping sentiment. Also, in contrast to the mood in Asia this morning the perception that the global economic recovery remains in place is helping to sooth risk appetite. European stock indices have pushed higher this morning, and the AUD, NZD and the CAD are performing well vs the USD. The pound has also had a good morning, boosted by stronger than expected economic data.

This morning’s 10 and 30 yr Spanish bond auctions provided decent bid/cover ratios of 1.89 and 2.45 respectively; though unsurprising borrowing costs have increased. As with last week’s 3 year auction this ability of Spain to raise funds on the open market can be seen as an endorsement of the recent policy commitments of the Spanish government, the ECB and the EU. That said, Spain has a very long way to go before its returns to fiscal health and it could be a long and bumpy ride for investors. Over the past few days, the Spanish government has been making a concerted effort to nip in the bud market fears over the weight of private sector debt. Yesterday the Bank of Spain committed to publishing the results of bank stress tests and earlier the Spanish savings banks denied the need for an emergency credit line. Comments from the ECB’s Noyer that he is in favour of the publication of stress tests suggest that increased transparency may be on its way. While underlying tensions in the interbank market are being heightened by uncertainty about where weaknesses within the sector lie, the publication of stress tests could intensify problems for some banks. Fears that investors may be less willing to help recapitalise some European banks are reportedly behind the reluctance of some EU officials to support the publication of stress tests. The risk that the European banking sector is still hiding a few skeletons suggests the EUR remains vulnerable in the medium-term. That said, this morning’s break above the EUR/USD 1.2355 technical resistance area suggests the near-term possibility of a move towards 1.2500.

EUR/CHF was hit hard this morning on the statement from the SNB that deflationary risks have ‘largely disappeared’. These remarks were in contrast to its statement in March which suggested that deflationary risk could not be entirely ruled out. The SNB also revised higher its inflationary forecast a touch to 0.9% y/y for 2010 up from +0.7% y/y. While these statements have led to some questioning as to whether the SNB will stand back from intervention, the SNB did make the comments that CHF strength is having a negative impact on export potential suggesting that it will continue to try an sooth and potentially limit the pace of CHF gains vs the EUR. That said, with the Swiss economy apparently outperforming that of the Eurozone, further gains for the CHF are probable vs the EUR.

UK May retail sales rose a stronger than expected +0.6% m/m. While a downward revision to the April figures undermined these data a little, strength was seen across the board in the non-food category. The data follow yesterday labour market report which showed that employment had increased moderately and therefore hints at an improving tone in the consumer sector. That said, the recent drop in the Nationwide confidence index suggests that consumers are wary about the forthcoming round of austerity which suggest that growth potential in the UK economy is likely to remain contained this year and next. Sterling benefitted on the data. However, the better tone vs the EUR has made for a choppy session in EUR/GBP. Cable is pushing higher having shrugged off earlier selling pressure which followed rumours that BP would have to unwind a sterling hedge related to the non payment of its next dividend. Last night’s speech by Chancellor Osborne which confirmed that regulatory powers would be handed over to the BoE was no surprise. The fact that the hand-over will be overseen by the FSA’s Sands has soothed some of the market’s immediate concerns.

Japanese PM Kan this morning underpinned his commitment to fiscal reform warning that unchecked debt levels could lead to IMF control of policy. This was part of the launch of the DPJ’s manifesto ahead of the July Upper House Election. Strong control of both parliamentary houses could strengthen the potential for fiscal reform, though many PMs before Kan have failed in this area. EUR/JPY has pushed higher this morning in line with the better tone of the EUR.

US CPI, initial claims, current account, Philly Fed and leading indicators in addition to Canadian wholesale sales data are due this afternoon.