All Eyes on Cyprus

With signs of the Euro zone debt crisis flaring again, Cyprus could potentially become the first nation to leave the single currency union. The EU has given Cyprus until Monday to raise funds to become eligible for a bailout. In the midst of escalating fears surrounding the Cypriot financial system, S&P cut the nation’s credit rating deeper into junk territory. After dismal PMI readings from Germany yesterday, deterioration in German business confidence for March has set the tone for another shaky session for the single currency today. At home, with an action packed week drawing to an end for Sterling, final estimate of the UK fourth quarter GDP will be in focus during next week’s session.

Pound Sterling – UK Markets

The Pound managed to stage a recovery against the Euro and the US Dollar yesterday buoyed by an upbeat set of economic data from the UK. The British retail sector has been hailed as a bolt from the blue after retail sales surged for February, far exceeding market expectations, thereby offering a glimmer of hope to the UK economic recovery. Furthermore a separate report showed that public sector borrowing was sharply lower than estimates last month, largely supported by the second instalment of cash transfers from the BoE and proceeds from the 4G spectrum auction. A weak set of PMI releases from the Euro zone and uncertainty surrounding the Cyprus bailout has helped the Pound to hold on to its gains against the single currency in today’s trading session. With an apparently quiet day ahead, focus is likely to shift to external cues for further direction. Going forward, a flurry of housing data scheduled next week is likely to shed light over the recovery in the housing sector. Additionally, the final fourth quarter GDP figures are likely to confirm that the UK economy slipped into contraction.

US Dollar – US Markets

Buoyant UK economic data led the US Dollar to slip lower against Sterling in yesterday’s trading session. However, the greenback remained quite volatile against the single currency as “risk on” sentiment remained tempered by headwinds in the Euro zone economy. Meanwhile, macro data released yesterday continued to paint a brighter picture for the US economy. A lower than expected number of Americans claiming jobless benefits further substantiated the fact the labour market in the US remains undeterred by the nation’s fiscal woes. Additionally, existing home sales continued to point towards an ongoing housing recovery, in line with the recent housing starts and building permits data. The manufacturing activity for the Philadelphia region also stunned market participants as data revealed an unexpected upturn for March. Against this backdrop, a raft of manufacturing data from other US regions due next week would be closely watched to ascertain whether the US economy can clock a higher growth rate this quarter. With a lack lustre day ahead, developments taking place on the other side of the Atlantic will be monitored for further cues.

Euro – European Markets

With risk sentiment remaining subdued following a dismal set of PMI releases across Europe, the timing of today’s Ifo sentiment indices could not be worse, as data indicated that confidence amongst businesses in Germany deteriorated for March. This should not come as a surprise to traders given an unexpected contraction in German manufacturing activity yesterday and has posed serious questions about economic growth in Germany for the first quarter. The crisis in Cyprus is deepening after the EU threatened to withdraw its bailout offer for the nation, if no deal is finalised by Monday. The European Central Bank also warned that it would cut off liquidity to Cypriot banks without a deal, risking a collapse of the nation’s fragile banking sector. S&P also raised concerns about the dire situation of the bailout crisis in Cyprus, as it lowered its credit rating on the nation by one notch to “CCC”. With Russia pouring cold water on appeals from the nation for help, it remains to be seen what form the proposed “Plan B” takes. All eyes are likely to be on the Cypriot Parliament today wherein members are expected to debate on government measures to stave off a crisis.

Other Currencies – Highlights

Buoyant retail sales helped the Canadian Dollar to garner traction against the greenback in yesterday’s trading session. Retail sales gained more than anticipated for January, recouping some of the previous month's fall, bolstered by strong vehicle demand. In this context, the GDP data due next week remain a key event on traders’ radar. Canadian finance minister, Jim Flaherty, in his budget yesterday, indicated that he is determined to eliminate the nation’s deficit by 2015. However, the performance of the Canadian Dollar has been hampered against the US Dollar this morning amid worries surrounding the Cypriot bailout deal. During next week, consumer price inflation data would be keenly watched and is likely to remain subdued for February. With the economy registering a contraction for December, it would be interesting to note what steps the Bank of Canada would adopts to reignite the economy.