The very strong demand for yesterday's Greek bond sale has bought a stay of execution for Greek assets this morning. EUR/USD is trading off its lows, the 10 yr Greek-Bund yield spread is toying with the 300 bps level, in the middle of the range for the week. The results of the Greek auction were not all good for the government; the higher costs associated with issuing debt might rightly reflect the additional risk that investors perceive but the addition costs will only compound the difficulties associated with reducing the budget deficit. Meanwhile, despite the pledges of further Greek austerity, popular sentiment in Germany that is provided the backing for today's meeting between Chancellor Merkel and PM Papandreou seems to be firmly against a hand-out for Greece. On the other side of the coin, the exposure of European banks to Greece in addition to the inevitable costs to German exporters of years of reform inspired recessionary conditions in Greece, Spain and other parts of EMU does underpin the responsibility of EU politicians to find a compromise agreement that will allow Greece to avoid collapsing deeper into crisis. Insofar as budget reform in EMU will take years and will be all the hasher because it will have to be implemented under the additional constraint of a fixed (and strong) exchange rate, there could be downside pressure on the EUR for some time yet.

The key address by Chinese Premier Wen lifted risk appetite a touch overnight. While Wen did express concerns over asset price bubbles and pledged to crack down on property speculation, he did not recommend any paring back of fiscal stimulus. He also warned of difficult conditions in Chinese export markets which suggest he is in no rush to allow the exchange rate to appreciate. That said, Wen announced an increase in public spending on health and social security spending. This is crucial in helping to boost domestic consumption and is a step towards addressing global imbalances. The Shanghai Composite closed up 0.3%. Far stronger gains were reflected in the Nikkei overnight (+2.2%), with this optimism also reflected in a weaker JPY. Yesterday's bounce in USD/JPY from technical support in the 88.20 was spurred by speculation that the BoJ will take further action at the March 16 policy meeting to steer the Japanese economy away from deflation. Comments from MoF officials earlier in the week suggest that there is still a lot of pressure on the BoJ to act further. While there was some speculation yesterday that the MoF may be inspired to intervene in the fx market, with the JPY not at critically strong levels at present, the risk of intervention is likely slim. AUD/JPY has sailed back towards 80.70. USD/JPY ran into resistance at 89.44. EUR/JPY is still constrained by the 121.50/60 area.

Cable is little changed this morning, though the pound is vulnerable to bad news from any weekend political opinion poll. Softer than expected UK Feb PPI input (0.1% m/m) is consistent with the BoE's view that the medium-term inflation outlook is benign. The PPI output rate rose to 4.1% y/y, but overall these data are insufficient to get the inflation hawks excited.

The release of the NFP data this afternoon is keenly awaited. Following signs from the ADP data and the labour component of non-manu ISM that the US labour market is stabilising it is possible that the market is positioned for a better set of data that implied by the -68K printed market median. The market is very aware that the NFP is more sensitive to the impact of bad weather than the ADP. This means that a very poor release is likely to be dismissed as weather related suggesting a greater risk of volatility from a good number.

Jane Foley
Research Director