EUR: Cyprus Fiasco Keeps Traders Nervous

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Daily FX Market Roundup 03-18-13

EUR: Cyprus Fiasco Keeps Traders Nervous
Dollar Becomes More Attractive than Euro
GBP: Is the Safe Haven Bid Back?
AUD: Holds Steady Ahead of RBA Minutes
CAD: Foreign Deposits Soar in January
NZD: Shrugs Off Stronger Data
JPY: Say Goodbye to Shirakawa

EUR: Cyprus Fiasco Keeps Traders Nervous

The euro remained under pressure against all of the major currencies throughout the North American trading session. While the EUR/USD rebounded off its earlier lows, the fiasco in Cyprus is constantly evolving, making any recoveries fleeting. At one point, it was thought that the Parliament’s vote on the levy on depositors would be postponed but as of the time of publication, Reuters has confirmed that the vote will take place as planned on Tuesday. However the Eurogroup appears to have given Cyprus a bit of flexibility but no details have been provided. Some speculate this could mean protection for depositors with less than 100,000 euros in their accounts but even this may not be enough to prevent the euro from falling. This is a terribly difficult situation for Cyprus and the euro. If the levy is not passed, Cyprus risks not receiving its desperately needed bailout from the European Union. If the levy is passed, it is a blow to confidence in Europe’s banking sector and to the government. We don’t expect politicians to approve the levy easily in the first round of voting and if we are right, the uncertainty could keep the euro under pressure as the Eurogroup confirms that Cyprus must stick to its goal of raising EU5.8 billion through a deposit tax levy.

Optimists argue that this situation is unique to Cyprus but we don’t know how reassuring that is as this would set a precedent for the entire region. We won’t even go into how unfair it is that senior bondholders are being saved at the expense of moms and pops and that depositors with money under their mattresses are safer than depositors in the bank. What we do know is that the Cyprus bailout has set the tone for trading in an extremely data and event risk heavy week by reawakening the fear of contagion. At bare minimum, there could be a capital flight out of European banks and slower LTRO repayments on the fear of liquidity problems. Unless Cyprus completely scraps the deal, we can’t see how some depositors won’t reconsider their investments in Europe.

As a result, we expect the EUR/USD to remain under pressure and investors to overlook any improvements in economic data. The Eurozone and German ZEW surveys are scheduled for release tomorrow and a minor deterioration is expected. If investor confidence weakens, it could compound the losses in the EUR/USD and even if confidence improves, it may not lend much support to the currency, as economists could be quick to say that the Cyprus bailout could change how investors feel about investing in the Eurozone.

Dollar Becomes More Attractive than Euro

Uncertainty in Europe restored demand for U.S. dollars. Not only is the greenback attractive for safe haven purposes but the recent improvements in U.S. data also made the dollar attractive from a growth perspective. While the decline in builder confidence (NAHB index) caught the market by surprise, stronger job growth last month should translate into stronger economic activity. The Federal Reserve is meeting this week and Bernanke will most likely acknowledge the latest improvements but the fiasco in Cyprus renews concerns about Europe and could therefore temper the Fed’s optimism. Also, while economic activity improved in the month of February, early signs for March have been disappointing with the University of Michigan consumer confidence index dropping sharply and today, builder confidence declining. Tomorrow’s housing starts and building permits will most likely surprise to the upside since these are February numbers and a rebound is expected after the decline in starts in January. While the potential for a government shutdown before the end of the month poses a risk to the U.S. economy and the greenback, the U.S. has been down this road before and survived. If Cyprus’ decision to tax depositors is finalized it would be a historic event for the Eurozone and could undermine confidence in the entire region’s banking sector. As result, we believe that the dollar will become more attractive than the euro in the near term particularly if we hear more optimism than pessimism from Bernanke.

GBP: Is the Safe Haven Bid Back?

The strength of the British pound against the euro today suggests that investors may be once again looking to the sterling for safety. Despite grim economic data and the prospect of easier monetary policy, the safety of the U.K. banking system is not in question and is therefore attractive to some investors. However we caution traders from being overly bullish GBP because there’s a number of potentially negative event risks this week that could drive the currency lower. Tomorrow’s consumer price report is important because inflation trends shape the central bank’s monetary policy decisions but after falling 0.5% in January, the 0.7% rebound that is expected is not abnormal. On an annualized basis, CPI is only expected to increase slightly with core CPI expected to fall. The BoE may be an inflation-fighting central but weak demand has made growth their number one concern. As a result, tomorrow’s producer and consumer prices reports won’t be as significant to sterling as Wednesday’s BoE minutes, employment numbers and 2013 Budget. The outcome of Wednesday’s reports will help investors decide whether sterling is really worth holding for safe haven purposes.

AUD: Holds Steady Ahead of RBA Minutes

Of all the major currencies, the Australian dollar did the best job of holding onto its gains against the greenback today. This resilience is thanks in part to the anticipated release of the minutes from the last Reserve Bank of Australia meeting. If you recall, the RBA left interest rates unchanged this month and the AUD/USD soared over 100 pips in the 24 hours that followed. Central Bank Governor Stevens maintained a glass half full view of the economy, which was verified by last week’s hot employment numbers. Confirmation that the RBA is done easing could extend gains in the AUD. The Canadian and New Zealand dollars on the other hand fell victim to risk aversion despite better than expected economic data. Foreign investors bought 13.34B worth of Canadian dollar denominated assets in the month of January. While this was not the strongest increase in the past 6 months, it is still up there in terms of significant inflows. Wholesale and manufacturing sales are due for release tomorrow. In New Zealand, consumer confidence declined in the first quarter but service sector activity accelerated, pointing to hope for New Zealand’s economy.

JPY: Say Goodbye to Shirakawa

With no Japanese economic data released over the last 24 hours, the Yen traded purely on risk appetite. The desire for safety caused by the uncertainty in Cyprus led investors to buy the Yen against every major. Demand for greenbacks however is still strong with the Bank of Japan poised for another round of aggressive easing over the next 6 weeks. BoJ Governor Shirakawa steps down tomorrow after serving as the head of Japan’s central bank for the past 5 years. He will be holding his final press conference at 6:30 GMT on Tuesday. Haruhiko Kuroda will take over as BoJ Governor on Wednesday and will be joined in the central bank by his 2 deputies, Kikuo Iwata and Hiroshi Nakaso. They will hold a press conference on Thursday and investors will be listening closely for insight into the BoJ’s plans. We know that Prime Minister Abe chose his candidates based on their commitment to easing aggressively. The only question is how quickly they will act. There are 2 BoJ meetings in April – one on April 4th and another of April 26th. Most economists expect the BoJ to announce their new easing program after the late April meeting, but there is a reasonable chance that the central bank could act sooner as the minutes from the February meeting revealed some members supporting new measures on April 4th. Either way, the BoJ is gearing up to do more and that explains why USD/JPY managed to recover so significantly off earlier lows.

Kathy Lien
Managing Director

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