AUD And CAD Jumped On Risk Appetite, EUR Struggled

The aussie and, to a lesser extent, Canadian dollar jumped overnight and remains firm in Asia on strong risk appetite. US equities were led higher by technology stocks as Intel earnings beat expectations. The Dow soared 103 pts to close at 12908 and is heading closer to near term resistance level of 12961. This level will be closely watched later today in US session and break would likely trigger further rally in high beta currencies. While commodity currencies are strong, European majors didn't follow as the euro, sterling and Swiss franc are bounded in tight range against dollar. Indeed, some weakness is seen in European yen crosses. Meanwhile EUR/AUD dropped to news record low of 1.1820.

The euro is struggling to find sustainable momentum for a rebound so far. Focus today will be on the German Bundestag, the lower house, as the justices vote on the country's participation in Spain's EUR 100b banking bailout. Germany is expected to guarantee as much as 30% of the total bailout package. Merkel's comment yesterday on the uncertainty of the "European project" continued to weigh on the sentiments on the common currency. Merkel noted that the European project hasn't been shaped in a way that she can be sure that everything will work and turn out well.

In Greece, Finance Minister Stournaras said after meeting with coalition leaders that the "general directions" of the austerity measures were decided, but there is still a "road ahead" before the whole package is completed. So far, it's believed that around EUR 8b of savings have be identified while Greece needs to complete a EUR 11.5 package for the next two years before meeting with the Troika. Greece will also need to seek bridge financing for the country's need until September. In Spain, the Treasury is set to sell EUR 2-3b of 2- to 7- year bonds today.

The IMF urged ECB to "provide further defences against an escalation of the crisis". It said in a report that the measures could include "policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure that monetary transmission, currently impaired by financial stress in some countries". Also, ECB should be give "explicit responsibility for financial stability", and "full lender-of-last-resort functions". ECB could also cut rates from the current historical low of 0.75% plus "buy a representative portfolio of long-term government bonds".

Fed Chairman Bernanke completed his second day of semiannual testimony yesterday Bernanke repeated his dovish outlook on the economy but said that a new recession is unlikely. He continued the pledge to act if economic conditions deteriorate but provided no hints on the timing of additional stimulus. The Fed's Beige Book economic report noted that economic activity grew at a modest to moderate pace in most districts with some signs of slowing.

On the data front, UK retail sales will be a major focus in the European session. Later in the day, US initial jobless claims, Philly Fed survey, existing home sales and leading indicators will be released.