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The market may be increasingly immune to Greek negotiations going down to the wire, but as Greek leaders meet once again later today the stakes for the country could not be higher. Athens' European counterparts aren't willing to give any ground on the implementation of austerity measures, and rather than consider scaling back on austerity to try and give growth a chance instead they want more austerity to make up for any economic short fall in the coming years.

Athens is finding out that sovereignty comes at the cost of fiscal responsibility and if you don't accept that responsibility and need to be bailed out by your fellow currency bloc members then the dynamics of sovereignty change. Merkel and Sarkozy are second-guessing the Greeks and assuming that they won't come up with the goods when it comes to austerity and structural economic reform. So rather than wait for Greece to come to some diluted solution reports today suggest that a plan B is being put in place by Berlin as we speak, which could be risk-friendly. Rather than deny Greece its bailout funds leading to a messy and volatile default, it will release funds to ensure bond holders will be paid their EUR 14.5bn on 20th March. However, rather than give the funds directly to Greece, the funds will be kept in an escrow account and distributed by European authorities not Athens.

This is why high beta assets are fairly resilient right now. Investors have little faith in Greece changing its spots in the near term but they don't believe that Europe will allow it to go to the wall either. Athens loses out either way: either its politicians agree to further austerity measures or they don't and the EU refuses to give them money to keep the day-to-day running of its economy afloat thus forcing austerity on them. Through by-passing the Greek politicians the EU creates certainty in the markets and this is why risk assets are fairly stable right now.

Added to that Dutch politician and EU digital affairs commissioner Neelie Kroes said in an interview published today that the euro will be fine without the Greeks and that it wouldn't be a case of man overboard if someone leaves the Eurozone. She was very critical of Greece and said it should follow the good example set by Italy. Kroes may be straying from the Merkel line that no one will leave the Eurozone, but it reflects a growing belief (and one that is permeating the markets) that the Eurozone is better off if it cuts Greece loose as that is where the sovereign problems persist. We don't believe a Greek exit is imminent, and if it were to happen it would be well signalled and prepared for and thus could take years. So although Europe is obviously losing patience with Athens it's unlikely to cut her loose just yet.

Stocks are slightly down in Europe today, while EURUSD is back above 1.31. Italian and Spanish bond markets are also fairly stable, although Portuguese yields are rising possibly on the back of yesterday's reports that Lisbon was sounding out investors for a potential restructuring of its debt Greek-style, although they were swiftly denied.

The commodity currencies continue to be the major out-performers with the Aussie the big mover of the day after the RBA surprised the markets and kept rates on hold. This caused a surge higher in the Aussie crosses, although there has been some willingness to take profit above 1.0800 in AUDUSD and below 1.2150 in EURAUD.

The RBA was expected to cut rates today; however its justification for staying put was the stabilisation in Europe since late 2011 and signs that the Australian economy is growing close to trend. However, the RBA remains ready to cut if the external economic conditions weaken materially, and with the Eurozone crisis far from resolved a future cut from the RBA cannot be ruled out. This warning from the RBA combined with the Aussie moving into overbought territory versus the majors is causing traders are taking profits where they can.

AUDJPY is definitely one to watch. It is has lagged behind gains in other Aussie crosses reflecting concerns in the market and the continued unease with the European sovereign crisis fuelling demand for yen. However, we are approaching a key resistance level at 82.70/80, which has capped gains since September 2011. Above here we could see a move back towards 85.00 highs, however for this level to be overcome we need to see a satisfactory resolution of the Greek austerity negotiations and the threat of disorderly default removed from the markets. Until that happens this could be a sticky level.

Elsewhere, Bernanke goes back to Capitol Hill today this time to talk to the Senate. We expect his comments to be fairly bland: the Fed is watching things closely, signs of economic recovery are gathering pace but unemployment still too high even after Friday's strong payroll number. Yet again there isn't too much on the economic data front to propel markets and headline risk from Greece could be the major driver. Good news could see us break out of the top end of recent ranges (1.3150 for EURUSD and 1.0820 for AUDUSD) while bad news could see us test the lows.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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