Why EUR Hit Fresh YTD Lows After Cyprus Deal

Posted on

Daily FX Market Roundup 03-25-13

EUR: Why it Hit Fresh YTD Lows After Cyprus Deal
USD: Equity and Currency Rallies Fizzle Quickly
GBP: Rises to 1 Month Highs vs. EUR
NZD: Looking for Stronger Trade
AUD: Stevens Speaking this Evening
CAD: Comm Dollars as Source of Safety?
JPY: Profit Taking Gains Momentum

EUR: Why it Hit Fresh YTD Lows After Cyprus Deal

Reaching a deal with the European Union should have been good for Cyprus and the euro and while Cyprus avoided a default and was granted emergency liquidity, currencies and equities fell sharply. To the confusion of many investors, the markets received zero relief from the bailout of Cyprus outside of an initial rally during the Asian and early European trading session. For the rest of the day, investors sold euros, taking the currency to its lowest level against the dollar this year. We can’t attribute the sell-off to one specific factor and perhaps that is the most worrisome aspect of the move. It is clear that investors aren’t convinced that the bailout will mean the end of Cyprus and the Eurozone’s problems. Banks reopen tomorrow (some will be closed until Thursday) and there could still be a run on the banking sector. Part of the sell-off was attributed to the Dutch Finance Minister’s comment that Cyprus is a template for bank restructurings – he quickly denied making such a comment but the EUR/USD never recovered. The reason is because regardless of how unique the problems are for Cyprus, the restructuring of the country’s banks sets a precedent that could be revisited in future bailouts. Finally, concerns about what to expect here on forward for the Eurozone also added pressure on the currency.

We are in the midst of a new phase of potential weakness for Germany, the Eurozone’s largest economy. Last week we learned that manufacturing and service sector growth slowed significantly this month, causing business confidence to decline. Later this week consumer confidence numbers are due for release along with retail sales and unemployment. In February, concerns about Italy hampered economic activity and confidence in the Eurozone. This month, we have Cyprus to blame and as a result, we expect the weakness in sentiment and economic data to remain soft for the time being. Right now, Cyprus is overshadowing Italy but the electoral deadlock is still creating uncertainty for the region.

Ultimately, the main reason why EUR/USD dropped to fresh lows after the Cyprus deal is because the deal does not eliminate the near term risks for Europe. The 1.2880 level was the main support for the currency pair and now that it has been broken, the next level of support is the November low 1.2660.

USD: Equity and Currency Rallies Fizzle Quickly

Early enthusiasm in the U.S. markets fizzled quickly as European stocks turned negative. The S&P 500 climbed to a fresh 5 year high before ending the day lower. It was a mixed day for the U.S. dollar, which traded sharply higher against European currencies but lower against the Japanese Yen and commodity currencies. The only pieces of U.S. economic data released this morning were secondary reports that yielded very little reaction in the dollar. Both the Chicago and Dallas Fed districts reported stronger manufacturing activity, which should bode well for the broader Chicago PMI report expected later this week. Fed Chairman Ben Bernanke and FOMC voter William Dudley spoke about the economy and monetary policy today. Bernanke did not make any fresh comments – he simply said the easing by advanced economies have helped global growth and noted that inflation is generally contained. Dudley on the other hand was not as reserved – he called on the Fed to keep monetary policy “very accommodative” because they are falling “well short” of their employment and inflation goals. He expects growth to be very sluggish in the first half of the year and for the recent rebound to lose momentum. As one of the most dovish members of the FOMC, Dudley’s pessimistic comments are in line with his general views. A number of U.S. economic reports are due for release tomorrow including durable goods, S&P / CaseShiller House Prices, Consumer Confidence and New Home Sales. We believe consumer confidence will be the most important release on the calendar and unfortunately based on the sharp decline in sentiment reported by the University of Michigan, we are weary of a disappointment that could compound the losses in USD/JPY.

GBP: Rises to 1 Month Highs vs. EUR

Even the British pound fell victim to risk aversion as sterling traded lower against the U.S. dollar and Japanese Yen. It still managed to tack on gains against the euro because the uncertainty stems from the Eurozone. Economic data was mixed with house prices growing 0.3% in the month of March and loans for home purchases declining in February. Bank of England Governor King spoke at the same conference as Bernanke and unlike his U.S. counterpart, he sounded more cautious, saying that the “banking crisis, the euro-area crisis and the fiscal crisis” are far from over and could have more twists and turns before it finally ends. We are not surprised to hear King’s pessimism but we wonder how much it really matters when the Monetary Policy Committee as a whole feels that the risk of higher inflation offsets the risk of weaker growth. The Confederation of British Industry’s sales report will be released tomorrow morning. A sharp rebound is expected which would be consistent with the improvements seen in the rest of the economy and could support gains in the GBP/USD.

NZD: Looking for Stronger Trade

It is always interesting to see the commodity currencies as some of the biggest beneficiaries of risk aversion because it is rarely the case. Usually the Australian, Canadian and New Zealand dollars are hit hard but today, they are holding up extremely well because Europe is the source of uncertainty and investors are looking at commodity producing countries as areas of safety. No economic reports were released from any of these 3 countries over the past 24 hours but tonight, New Zealand trade numbers are on the calendar and it will be followed by comments from Reserve Bank of Australia Governor Glenn Stevens. In New Zealand, stronger manufacturing activity points to stronger trade, which could be positive for the NZD. Stevens’ comments shouldn’t pose much threat to the AUD either because of his glass half full view of the economy.

JPY: Profit Taking Gains Momentum

The Japanese Yen traded higher against all of the major currencies, which should not surprise anyone who has read our special report on the 3 reasons why USD/JPY could see near term losses. March 31st marks the end of the Fiscal Year in Japan and this means repatriation. Japanese companies have a history of repatriating money from their subsidiaries abroad to window dress their balance sheets in the last 2 weeks of March and traditionally this has been positive for the Yen. The recent strength of the Yen suggests that repatriation has already begun and could continue into the coming week. Repatriation flows alone won’t cause a massive rally in the Yen but it could be enough to drive USD/JPY down to 94. While there is little question the BoJ will increase asset purchases next month, considering the amount of speculation and positioning that has built up in anticipation of additional easing, the new central bank may need to over deliver to avoid disappointment. We still expect USD/JPY to hit 100 but we do not preclude a pullback to 92 before that happens especially if the markets remain risk averse.

Kathy Lien
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *