The reassurances from the UAE's central bank that it stands behind local and foreign banks in the face of a possible default from Dubai World eased risk aversion last night and chased Asian stock markets higher.  Anxiety has remained obvious in Europe, however.  European stock markets erased early gains and EUR/USD has edged lower from an overnight high at USD1.5083.  EUR/JPY and USD/JPY has posted lows of 127.06 and 84.91 respectively in early London hours following a report in a Japanese newspaper that Finance Minsiter Fujiii had said the Gov't will not intervene to weaken the JPY.   In contrast, the JPY was sold sharply during London hours as Japanese Strategy Minister Kan stated that the Government agrees to measures to stop the yen rising.   The recovery in USD/JPY was short-lived.  The apparent rift between the MoF and the BoJ on how to approach the issue of deflation in the Japanese economy combined with the very low level of USD rates have both contributed to scepticism on the risk of intervention in USD/JPY.  That said, BoJ Governor Shirakawa and PM Hatoyama are scheduled to meet later this week and this will keep the market nervous about the prospect of action on the JPY.

Sterling has traded in a choppy fashion this morning albeit with a downside bias.  Month end activity is probably playing a part in price action but sterling has been hit by some gloomy weekend press activity, a weaker than expected Nov Gfk consumer confidence release this morning (-17 compared with a median of -11) and a poor 10.8% y/y increase in broad money which suggests that QE is still not clearly supporting the real economy.  Housing market data, however, were mildly positive with mortgage applications reporting the highest number since March 2008.  This is indicative of some recovery in demand and corresponds well with the Nov Hometrack Housing survey which suggested a +0.2% m/m rise in prices.  EUR/GBP is currently trading a little off the day's high at 0.9138, cable is hovering above its daily low at 1.6460.  

ECB President Trichet et al have returned from China empty handed.  Chinese Premier Wen has complained that it is unfair to call for yuan appreciation while imposing trade protectionism on China.  This Thursday's ECB council meeting is expected to outline more detail on ECB exit policies particularly with respect to the ECB's 12 mth allotment.  The removal of this support may highlight relative weaknesses in some of the Eurozone's financial institutions.  Nov Eurozone CPI has ramped up to +0.6% y/y. However, with this rise linked to energy prices it does not alter the fact that ECB rates will be low for a long time.  

Swiss Q3 is due tomorrow.  The market expects this to rise +0.3% q/q.  The return of growth to Switzerland has sparked talk that the SNB may water down its policy of intervening to prevent CHF strength which could push EUR/CHF sharply lower.

US Chicago PMI and Canadian Q3 GDP data are due today.  
Jane Foley