The EU's Monetary Affairs Commissioner Rehn is to meet with the Greek Finance Minister Papaconstantinou today.  Over the weekend Chancellor Merkel and Luxembourg PM Juncker had suggested that Rehn will be demanding that Greece takes further steps to cut its budget deficit. In view of the difficulties that the Greek government will have in turning the screws on an electorate which has already paralysed the country in a series of strikes, the EUR has given up some of its earlier gains on confirmation of this meeting.  Weekend rumours that the EU may be on the point of announcing a stabilisation package for Greece have been supporting the EUR.  It seems likely that a package for Greece will take the form of guarantees for Greek debt; Greece will have to issue as much as EUR53 bln this year.  While the avoidance of Greek default could allow a decent short-term bounce for EUR/USD, it may be little more than a band-aid on a system which clearly lacks adequate fiscal constraints.  It may take years before Greece can get its budget in order and there are no guarantees that it will be able to manage this gigantean task.  Greece after all failed to restructure its budget in the 'fat' years before the financial crisis.  In the coming years the higher costs of maintaining its debt, coupled with slow/negative growth will combine with the difficulties of operating under a strong and inflexible currency regime.  The fact that other countries within EMU will also struggle to get their budgets in order over the next few years will continue to weigh on the EUR in the medium-term.  Italy this morning announced a 2009 budget deficit of 5.3% of GDP.  While this was wider than expected it remains well below the 12.7% of GDP level of crisis-laden Greece.  

Optimism that a support package for Greece is in the offing has helped risk appetite this morning.  Sterling, however, has not benefited.  Cable has dived below the USD1.5050 level on the back of an intensifying of existing concerns over debt and the outcome of the general election.  An FT report that UK bonds are trading as it they have already lost their AAA status and the fact that the incidence of a hung parliament, first evident in the polls at the end of last year, is not diminishing is undermining confidence in the pound further.  The better tone of the EUR this morning has allowed EUR/GBP to break above the 0.9000 suggesting scope back towards 0.9150; cable could be headed towards the USD1.4850 area.  While the drop in UK Jan mortgage approvals data this morning may be showing a stalling in the housing market recovery, UK manufacturing PMI was moderately supportive showing further evidence of expansion and hinting that at last the weaker pound is having an economic benefit.  

The JPY has softened in part due to increased risk appetite but also in response to comments from Finance Minister Kan that he wants the BoJ to boost efforts to fight deflation.  

Copper prices surged on the back of the Chile earthquake despite reassurances that contracts would be filled. Commodities across the board benefitted which pushed AUD/USD back to 0.900 before the USD fought back.  GBP/AUD continued to probe the downside.  The RBA will announce tomorrow whether or not it is hiking interest rates by 25 bps.  There is scope for further AUD gains on a tightening announcement.  
US personal income, spending and ISM data are due.
Jane Foley
Research Director