There was a lot mud thrown at the EUR last week. The outcome of the EU summit was disappointing in the sense that a resolution to the plans for a bigger and better EFSF has been delayed until June.

Also, Portugal entered into political crisis which triggered a round of credit ratings downgrades and probably moves the country closer to requesting an EU bailout and Spanish banks were also subjected to a round of downgrades.

This week the outlook for the EUR appears also to be strewn with potential pitfalls. Ireland is back in the headlines. Ahead of this week's publication of its latest banking sector stress tests are reports that the Irish government wants senior bondholders to share with taxpayers the cost of its banking crisis.

Ireland is trying to twist the ECB's arm into granting it around EUR60 bln in medium-term funding to support the banks, though there is no sign as yet that the ECB will comply ahead of the stress tests. This stand-off could result in increased pressure on the Irish short-end. Also, Germany's governing CDU party has lost a stronghold in Baden Wuerttemberg which may lessen the financial support Merkel can offer towards the periphery going forward.

The mud, however, isn't sticking to the EUR; at least not in large quantities. Relative to the start of last week, EUR/USD is trading around 1.2% lower. For now the market seems to be content to take the view that political will is sufficiently strong to protect EMU and that the crisis in Portugal is only a sideshow.

Critical to the maintenance of this view is Spain, one of Europe's most significant economies. Spain is currently being viewed as likely to being able to avoid a bail-out. If this view changes the EUR would undoubtedly fall hard.

Also supporting the EUR is the view that the ECB may hike interest rates as soon as next week. Interest rate differentials appear to been the greatest driver of EUR/USD this year. Another support for the EUR relates to the generally strong appetite for risk at present. The VIX dropped sharply last week reflecting the solid tone in US stock indices.

Neither the Middle Eastern crisis nor the ongoing nuclear threat in Japan seems to be denting sentiment significantly. A crucial component to risk appetite going forward will be the release on Friday of US payrolls data. A decent number here will likely further cajole investors into viewing the world through rose tinted glasses which would likely lend additional support to the EUR.

That said, in view of the recent EMU negative news, we see EUR/USD as been hard pressed to push above the 1.4250 level this week and see potential for EUR/USD to test the water below 1.400 near-term.

CAD

Canada may be facing its fourth election in seven years but the CAD is holding in fairly well. Strong oil prices and a generally weak USD have been placing offsetting downward pressure on USD/CAD. That said, election uncertainty and a paring back of BoC rate hike speculation is likely to moderate immediate potential for the CAD. Near-term support at USD/CAD0.9732.

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