Spreads of Greek bonds over Bunds have been widening noticeably in the wake of the Greek 7 year bond sale yesterday.  The debt office is under pressure to reduce the cost of issuance.  The result was a smaller than expected coupon on yesterday's 7 Yr bond and bids over just sufficient to cover the paper offered.  The Greek government have now raised enough funds to cover their funding requirements through to the end of next month but it will likely have to go to the market again before the summer.  Between now and then the market will be watching closely economic developments in Greece, though given flaky economic statistics and pledges of deep austerity a palpable improvement is unlikely.   Given that the market's demand for a risk premium is essentially incompatible with the government's need to reduce the costs of funding there is still the risk that Greece may still fail to raise sufficient funds on the open market this year.  The EU's new support mechanism may yet be tapped by Greece and the IMF, with its relatively cheap funding, is also still in the frame.  EUR/USD has turned lower as the news of the lacklustre Greek bond sale.   Comments from the Bank of Spain calling the government's fiscal consolidation programme very ambitious increased the worries in the market.  The Bank of Spain forecast that its economy would shrink -0.4% y/y in 2010 before growing modestly by +0.8% y/y in 2011.  Ireland is also back in focus this morning given fears that the new Irish 'bad bank' will force banks to increase capital requirements.  From a session high of USD1.3534, the EUR dropped back towards the 1.3450 level before buyers emerged.

An upward revision to UK Q4 GDP (+0.4% q/q) and better current account data have underpinned the pound this morning.  Cable has pushed higher towards USD1.5080 helped also by a ComRes opinion poll giving the Tory party a 7 pt lead over Labour and by the stronger than expected Nationwide March house price survey (+0.7% m/m).  While the headline figure looks constructive the Nationwide pointed out that the number of new mortgage loans has failed to recover from January's large dip suggesting continued caution in this market.  

The better USD has taken the steam out of commodities prices in general with both oil and gold dropping back towards yesterday's closing levels.  AUD/USD climbed back to the 0.9210 level early in the European session, though it subsequently consolidated close to the 0.9200 area.  Comments from the RBA's Rudd overnight offered few fresh insights although his remark that mortgage rates have not risen as much as the cash rate injected a little more life into the view that the RBA may not wait too long before hiking interest rates again.  The early weakness in USD/CAD has been stemmed by the better tone in the USD.  Increasingly the market is awaiting Friday's US payroll data for fresh direction on the USD.  

US S&P/CaseShiller house price data and March consumer confidence numbers are due.  

Jane Foley
Research Director