I have successfully got the grid to work by copying the XML into the javascript and using 'xmlstring'.
However when I copy the XML into a static file on my webserver and try to load the grid from that I still get the same issue, i.e. the grid is blank.
Firebug shows me the correct XMl in the response. The only possible issue here is that Firebug does not automatically have the response body saved. Instad I have to click the 'Load Response' button and Firebug will go and retrieve it. However this is also the case for other resources that downloaded as part of the page so I'm failry sure this isn't an issue.