Time is running out for Greece.  On April 20th and May 19th two Greek government bonds amounting to EUR8.2 bln and EUR8.5 bln respectively will mature.  It is estimated that the Greek debt office still needs to raise EUR10 bln to roll-over this debt. While this month's 10 yr bond sale was three times oversubscribed Greece has made it clear that it cannot simultaneously reduce its budget deficit and carry on issuing debt at the rates that have been demanded by the market so far this year.  If the EU do not soon come up with a system of guarantees which will cause Greek bond yields to fall in the open market, then it seems inevitable that Greece will approach the IMF for support.  The cost of IMF funds is likely to be substantially below the current 6.4% yield on Greek 10 yr bonds.   Even though it is probable that support for Greece will come from either the EU or the IMF in the next couple of weeks, the market is becoming increasingly aware of the fact that EMU fiscal difficulties will not immediately disperse.  Greece faces a long hard struggle to bring its budget deficit down in a recessionary environment which is made all the tougher by the presence of a strong and inflexible currency.  Even with IMF/EU support there remains a strong possibility that Greece will fail to achieve its deficit reduction targets in the coming years.  Ongoing fiscal concerns would inevitably continue to weigh on the EUR.  Not only that but assuming that Greece, Spain, Portugal, Ireland et al are successful in reducing their budget deficits substantially over the next 3 years there will be an inevitable drag on growth in the EMU; this scenario can be expected to weigh on the EUR too.  EUR/USD is likely to maintain its medium-term downward adjustment.   Following a sharp move lower during London hours, EUR/USD has hit a session low of 1.3560.  

Following the squeeze on short positions earlier in the week, cable has fared even worse than the EUR this morning.  Early remarks from the BoE's Sentence that there was still some risk of a double dip recession in the UK trounced the slightly more hawkish indications in this week's publication of the March MPC minutes.  Despite reports that Chancellor Darling plans to use the higher than expected February tax revenues to reduce projected borrowing fears persist that he announce pre-election sweeteners at next week's budget.  This may reduce the market's favoured outcome of a majority Tory government after the upcoming general election.  Cable is currently running into support near 1.5130.  There were no UK data releases this morning.  

On the back of the soft EUR, EUR/CHF has continued to probe the downside this morning despite comments from the SNB's Danthine yesterday that the SNB will continue to counter excessive CHF strength.  The all time low of EUR/CHD1.4301 is clearly in view ahead of trendline support at 1.4205.  USD/CHF has been feeling some of the pressure of CHF strength of late, though range-trading has persisted today.    

Stronger than expected Canadian CPI data at 1.6% y/y  has reaffirmed the market's perception that the BoC is likely to position itself for a rate hike this summer and ahead of the FOMC.  The post-data fall in USD/CAD has unwound yesterday's move higher and strengthens the likelihood of a test on parity in the coming weeks.  Canadian retail sales are due this afternoon.  
Jane Foley
Research Director