Despite the poor performance of Japanese stock markets overnight, once again European hours have brought a moderately improved taste for risk.  Stock markets are modestly higher, the JPY is softer across the board and even the EUR has found some buyers.
The market has been cajoled into the view that Greece will not be allowed to fall out of EMU.  Despite denials from the German Finance Ministry yesterday over a potential bailout for Greece, the FT reported this morning that the EU has made clear that it would not abandon Greece.  European Commissioner Almunia this morning stressed there is no threat of a Greek default and no chance of it moving outside EMU.  Finance Minister Papaconstantinou continued with the PR though denied any knowledge of bail out talks.  Yields on Greek bond have fallen this morning in the 3yr to 30 yr  region.  Following a decline to an overnight low of EURUSD1.3915, the EUR has benefitted from short-covering pressure pushing it to a session high of 1.3980.  While the official rhetoric is having the desired effect of limiting the damage on Greek yields, action speak louder than words and it is by no means clear that that the Greek electoral have the appetite for the severe spending cuts needed to bring the budget back in line.  That said EMU was always more about politics than economics and for this reason the wealthier economies of EMU will eventually protect their system and bail out Greece.  They will of course make Greece squirm first; lessons have to be learnt and pledges have to be made and during this process the EUR will remain vulnerable not least because Spain and Portuguese budgets offer addditional threats. 

As indicated earlier in the week Japanese Finance Minister Kan used his scheduled speech today to increase the pressure on the BoJ to  act appropriate and flexibly if necessary to underpin growth. BoJ Chief Shirakawa followed with the statement that the BoJ is prepared to act swiftly and decisively.  While the JPY is presently not at levels considered dangerous for the Japanese economy, these statements do underpin the perception that under its new leadership the MoF is less tolerant of JPY strength.  Intervention may not be a risk yet but further emergency policy measures from the BoJ cannot be ruled out.  That said the BoJ is stuck with the problem that pumping money into the system does not necessary increase the will of the real economy to make use of it.  A plentiful supply of cheap yen would help promote its use as a funding currency but a strong uptrend in USD/JPY may only take hold after the risk of Fed rate hikes becomes firmly entrenched.  USD/JPY ran into strong resistance this morning at JPY90.30, EUR/JPY has filed to move much beyond 126.20. 

The UK Nationwide house price index for Jan posed a strong 1.2% m/m.  Cable moved to a session high below 1.6180 this morning.  Strong support is still evident at the USD1.6100 level.  EUR/GBP has consolidated with a modest upside bias.

Main focus this afternoon will be the US Q4 GDP release, the market is expected an annualised release of 4.7%.  The relative strength of this data could have a determining impact on risk appetite over the next week or so. 
Jane Foley
Research Director