EUR/USD held above the USD1.3400 level through much of the European morning following yesterday's soothing remarks from ECB President Trichet with respect to the Greek debt crisis.  Trichet played down both the likelihood of a Greek debt default and also his recent opposition to the prospect of IMF support.  Greek bonds yields has fallen moderately today in tune with the better tone of the EUR.  However, present yields are still likely to prove unpalatable for the Greek Debt Office.  Given the Greek government's  need to issue EUR11.6 bln in May and EUR 32 bln through the rest of the year rumours are circulating that the Greek government may be forced to turn to the EU and the IMF for support as soon as this weekend.  The EUR remains vulnerable both on fears of contagion to Portugal and on fears that Greece's deficit issues merely point out the difficulties of maintaining monetary union without fiscal collusion and thus are only a symptom of the deeper fractures that run through EMU.  

The better tone of the EUR has been consistent with improved risk appetite this morning.  Stock markets are generally trading higher and the yen is softer.  The AUD and the CAD are both benefitting from gains in commodities prices with the CAD finding additional support from hopes of a strong labour data release this afternoon and the AUD benefitting from the argument that Australian exports stand to see a positive boost from any appreciation in the yuan.  On the back of Treasury Secretary Giethner's surprise visit to China this week, speculation is mounting that a revaluation of the yuan may happen ahead of the IMF/World bank meeting on April 24.  That said forecasts that China will tomorrow publish a trade deficit for Mar are a reminder of why China pegged its currency in the first place.  Soft Chinese data would imply a delay on any decision to alter the yuan's currency peg potentially to Q3.  

Cable has been one of the strongest performers of the session.  The publication by the Conservative opposition of some detail in how it would make GBP 12 bln in efficiency savings has been met with relief.  The Tory party's promises to tackle the budget deficit have made it the more market friendly political party.  However, its previous lack of detail on budget reform combined with fears that too much austerity too soon could lead to a double dip recession have been undermining support.  Fears of a double dip recession were further pushed into the background yesterday on the stronger than expected manufacturing production data and on the indication from the NIESR that the economic recovery continued in Q1 in spite of prolonged wintry weather.   If the Tory party pull a victory out of the hat on the May 6 election day EUR/GBP would likely move a notch lower.  This outcome would also strengthen the likelihood that cable has already seen the lows of the year.  Stronger than expected PPI data this morning (core output 3.6% y/y), will ensure that inflation remains a hot topic in sterling markets in the months ahead.

A strong set of Canadian data this afternoon may send USD/CAD back to its recent low near 0.9970.  US wholesale inventories are also due.  

Jane Foley
Research Director