Big Trouble in Little Cyprus

The Euro is embroiled in a fresh storm this morning following news that EU finance ministers plan to impose a one-time levy on bank deposits in Cyprus as a part of its bailout deal. This has raised fears of a run on fragile European economies, further deepening the Eurozone debt crisis. A vote on the proposed measure is expected in Cyprus Parliament later today and if passed, could set a precedent for future European bailouts. At home, much of this week’s sentiment is set to be driven by the annual budget scheduled on Wednesday. It will be interesting to see how the Chancellor strikes a balance between his current austerity measures and calls for pro-growth measures.

Pound Sterling – UK Markets

Sterling has strengthened against the single currency this morning after Euro area finance ministers agreed to grant a bailout to Cyprus on the condition the nation agrees to levy taxes on its bank deposits. However, with the UK economy set to present its annual budget midweek, it remains to be seen how long the Pound manages to hold its ground against the Euro. Although the Chancellor is expected to present another austere budget, it would be interesting to see whether he bows to pressure to stimulate the ailing British economy. With the minutes of the BoE’s latest monetary policy meeting due later this week, any change to the number of MPC members supporting calls for further easing would definitely weigh on the near term performance of the Pound against the majors. On the macro front, Rightmove has reported that average asking prices for a home in the UK has risen for a third consecutive month, providing evidence that activity in the housing sector is gaining momentum. A raft of other important economic releases during the week will also be keenly watched.

US Dollar – US Markets

A rather tough precondition to the Cyprus bailout has led the US Dollar to make gains against the single currency this morning. We believe that the Cyprus induced “risk off” sentiment would prevail in today’s trading session. Meanwhile, data released on Friday provided mixed signals on the economic front. Data revealed that industrial production rebounded more than forecast for February on the back of strong performance from manufacturing and utility sectors. However, confidence among consumer has wobbled amid an uncertain outlook on the fiscal front. Meanwhile, consumer price inflation has remained contained for February, providing room for the central bank to continue with its current monetary policy. Against this backdrop, the FOMC meeting due later this week will remain a key event on traders’ radar. With the US economy languishing at a moderate pace, any indication to taper the bond buying programme would be US Dollar positive. With a light economic calendar today, markets are expected to pay attention to the NAHB housing market data due during this trading session.

Euro – European Markets

In an unprecedented move, Eurozone finance ministers agreed to provide a €10 billion bailout for Cyprus, if the nation imposes a tax on bank deposits to help pay for the rescue. The common currency weakened against the majors and traded below the 1.29 mark against the US Dollar for a brief period. Traders fear that a levy on bank deposits in Cyprus could risk bank runs elsewhere in the region and spark a new saga in the European debt crisis. With the Cypriot government meeting today to vote on the proposed levy, markets are likely to remain on sidelines ahead of the outcome of the voting. The much awaited EU summit which concluded on Friday provided some positive news to investors. EU leaders granted countries such as France, Spain and Portugal extra time to narrow their deficits. However, this news seems to have clearly being eclipsed by the ongoing turmoil related to the Cyprus bailout deal. With market sentiment likely to remain subdued in today’s trading session, Eurozone trade balance data is likely to have minimal impact on risk appetite.

Other Currencies – Highlights

The New Zealand Dollar has nudged lower against the US Dollar this morning after a bailout deal for Cyprus prompted traders to shun high yield currencies. Moreover, data showed that consumer confidence in New Zealand declined marginally for the first quarter of 2013, providing evidence that consumers have become cautious amid worsening drought conditions and soft labour market outlook. However, the service sector activity showed resilience as it ticked higher for February, in line with the recent improvement in manufacturing activity. With no major domestic economic releases due today, market sentiment is likely to be swayed by developments in Eurozone. Going forward, traders keenly await the fourth quarter GDP data in New Zealand due later in the week to gauge the performance of the economy. Markets expect the economic growth to accelerate which would prove positive for the Kiwi Dollar against the majors.