The markets have been snapping up risky assets in the last two days. Stocks have reached new highs and the S&P is currently at its highest level since September 2008, oil remains above $90 per barrel and the Aussie dollar has breached parity once again with the US dollar. The improvement in risk sentiment has also pushed the euro higher; EURUSD is trading above 1.34 at 1.3450 after having briefly touched 1.3500 in early trading during the European session. If the single currency can breach 1.3500, it suggests further gains to the 1.40 level, the high reached back in November.

The backdrop to this euro strength is the meetings of European officials that concluded yesterday with the Eurozone finance ministers' conference. Although there was a slight hope last week that a solution to the sovereign debt crisis might be found at this week's meetings they have ended with very little progress toward a credible permanent solution. Germany said that there was no urgency to expand the size and scope of the EFSF rescue fund, one of the measures touted as necessary to calm markets. Likewise, the creation of a Eurozone-wide bond probably didn't even make it on to the agenda. We now have to wait until March before ministers will decide on the fate of the EFSF fund, while the fresh round of European banking stress tests are due to start in February, but the results won't be disclosed until July. So the can gets kicked down the road yet again.

For now, investors are giving the euro-area the benefit of the doubt and EURUSD is holding well above its perceived fair value of 1.20 per US dollar, but this may not always be the case. There was a slight wobble in the single currency this morning after reports surfaced that Germany was taking matters into its own hands regarding the Greek debt crisis and was helping the beleaguered nation restructure its debts that would require it to buy back government bonds with funds from the EFSF. These reports have yet to be confirmed, but it shows the power Germany has within the currency bloc.

With talk of Greek debt restructurings and Irish political turmoil dominating the headlines Germany's trail of strong economic data keeps growing. Today the German economics ministry released its bi-annual economic report, which predicts solid growth for the European export powerhouse at 2.3 per cent in 2011, unemployment at 7 per cent and for the budget deficit to narrow to 2.5 per cent of GDP by the end of this year. So far a strong Germany is helping to propel the euro higher, but it will be interesting to see how long this lasts, especially with Portuguese government bond yields on the rise again; yields are currently above the critical threshold of 7 per cent that could drive Lisbon to the EU/IMF bailout fund.

Sterling has come under pressure since the release of employment data for November earlier this morning. Even though the report was fairly encouraging, GBPUSD has not managed to sustain gains above 1.6000, and is currently trading at 1.5960/70. The UK unemployment rate held steady at 7.9 per cent in November, but the number of people seeking jobless benefits actually fell by 4,100. This was put down to hiring by the manufacturing sector prior to the Christmas season, which has picked up strongly. The lone dove on the Bank of England's Monetary Policy Committee Adam Posen is speaking today. It will be interesting to see if his stance to expand QE has changed after the mammoth print for December CPI, which showed that prices rose by a 3.7 per cent annualised pace. The pound is moving with risk, so any pullback in risk could hurt sterling today.

Elsewhere, the dollar is under pressure contrasting with the rally in risky assets. Tomorrow's economic data stateside, which includes jobless claims and existing home sales, will determine the direction of the greenback into the end of the week.

Yesterday's stellar 2010 earnings from Apple saw the stock shrug off news that CEO Steve Jobs had taken indefinite leave, rising more than 5 per cent during the New York session. This helped push the Nasdaq to fresh cyclical highs. Today's earnings highlights include a plethora of US financial institutions including Goldman Sachs, Wells Fargo, State Street and Bank of New York Mellon. After markets close eBay announces its results. The financial sector makes up more than 16 per cent of the S&P 500 so today's earnings releases could impact the US blue chip index.

Also watch out for volatility in the Kiwi dollar later this evening. The fourth quarter 2010 inflation print is expected to push the YoY rate to 4.1 per cent from 1.5 per cent in the third quarter.

Data watch:
Canada 13:30GMT (0830 ET) Manufacturing Sales (Nov) m-o-m 0.30% exp, 1.70% last
United States 13:30 GMT (0830 ET) Housing Starts (Dec) m-o-m 3.90% last -0.90% exp
United States 13:30 GMT (0830 ET) Building Permits (Dec) m-o-m -4% last, 1.8% exp
Canada 15:30GMT (1030 ET) BoC Publishes Monetary Policy Report 
Germany 16:30 GMT (1130 ET) Bundesbank's Dombret Speaks
UK 17:00 GMT (1200 ET) BoE's Adam Posen speaks
Euro Area 18:00 GMT (1300 ET) ECB's Stark Speaks
New Zealand 21:30 GMT (1630 ET) Business NZ PMI (Dec) 52.7 last  
New Zealand 21:45 GMT (1645 ET) CPI (Q4) q-o-q 1.10% last, 2.40% exp 
New Zealand 21:45 GMT (1645 ET) CPI (Q4) y-o-y 1.5% last, 4.1% exp

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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