With the lack of freshly negative headlines out of Cyprus and mixed U.S. economic reports, currencies are trading cautiously today. The calendar was heavy with U.S. data and there were both surprises and disappointments. For the Federal Reserve, the lack of consistent improvements in the economy is one of the main reasons why weaning off QE is a long-term discussion. Thinking about the exit is the right thing for the Fed to do but they are still miles away from acting on it.
Of all the economic reports released today, consumer confidence is the most important and unfortunately the Conference Board’s index dropped from 68 to 59.7 in the month of March. This decline was consistent with the deterioration reported by the University of Michigan and Investors Business Daily who both cited concerns about labor market conditions and the sequester. Weaker confidence could weigh on consumer spending at the end of the first quarter. New home sales also dropped 4.6% in February but this decline represents a correction after the sharp 13.1% rise in January. The beginning of the year was a good one for the labor market with house pricing rising 1.02% according to S&P / Case-Shiller, the strongest increase since June 2006. Durable goods orders also jumped 5.7% in the month of February. This increase was more than anticipated and driven largely by a 95.3% rise in commercial aircraft orders. Demand for autos also rose 3.8% but excluding transportation orders, durable goods fell 0.5%. Durable goods can be extremely volatile and therefore we caution traders against reading too much into these numbers because the changes this month mostly reflect a payback from last month.
Meanwhile EUR hasn’t budged because the deal between the Eurogroup and Cyprus has not resolved all of the unknowns – depositors with accounts over 100,000 euros still don’t know exactly how much they will lose, all banks are closed until Thursday and capital controls could remain in place for weeks and possibly even months. There’s even been talk that Slovenia whose yields spiked up to 5.4% could be the next Cyprus but with debt to GDP at only 52.7% and bank deposits accounting for only 125% of GDP versus 800% in Cyprus, we agree with the ECB that the contagion risk for Slovenia is minimal. Nonetheless, we need some good news for the EUR/USD to rally as traders wait for banks in Cyprus to reopen on Thursday.
Overnight, USD/JPY received a boost from the Bank of Japan Governor. During his Parliamentary testimony, Kuroda sounded optimistic about the economy and committed to easier monetary policy. He said the economy has stopped weakening and showed positive signs of improvement. The weaker Yen helped to boost corporate and household sentiment but uncertainties are high for Japan’s economy and therefore the BoJ will need to do whatever it takes to end deflation. More specifically, the central bank plans to discuss different ways to lower the yield curve including extending bond maturities in their asset fund along with increasing purchases of long term bonds. He expects to achieve their 2% inflation goal in 2 years but admitted that they may not be able to accomplish this goal through monetary policy alone.