Cyprus Gets a Lifeline

In a last minute deal with its international creditors to clinch a bailout package, Cyprus has agreed to close down one of its two biggest banks and restructure the second. Though the deal has been able to protect small depositors with deposits under €100,000 and led the common currency higher today, the repercussion of the aid deal on fragile Eurozone economies is yet to be seen. At home, given the nation’s dire state of economic affairs, Fitch has placed the UK’s credit rating on review for a possible downgrade. Meanwhile, data just released has shown that appetite for home loans in the UK ebbed a bit for February.

Pound Sterling – UK Markets

The Pound has lost steam against the single currency in today’s trading session as an agreement between Cyprus and international lenders for the former’s bailout boosted demand for the Euro. However, prevalent optimism surrounding the Cyprus aid deal has helped Sterling to limit losses against the US Dollar. Meanwhile, on the domestic front, data just out has revealed BBA mortgage approvals declined for February. However, Hometrack reported that house prices in Britain advanced at their fastest pace in three years for March, helped by a weaker Pound and turmoil in the Eurozone which has lured purchasers from aboard. In the midst of the UK budget casting a cloud over the outlook for economic growth, Fitch has placed the UK’s “AAA” credit rating on review for a possible downgrade, citing high government debt levels and weak growth. With the nation losing its coveted rating from Moody’s recently, it remains to be seen whether other agencies also follow suit. With a light domestic economic calendar today, external market cues will be closely eyed for further direction to currency markets.

US Dollar – US Markets

“Risk on” sentiment seems to be the theme of today’s trading session after Cyprus avoided financial meltdown and potential turmoil across the Eurozone by securing a €10 billion bailout deal, thereby leading the US Dollar to nudge lower against the Euro this morning. With the recent manufacturing PMI painting the sky blue, Chicago and Dallas manufacturing activity data scheduled for release later today is likely to point towards an improving trend in the US economy. Additionally, Ben Bernanke’s speech due later in London will be closely followed for hints to the central bank’s future policy moves. Moreover, tomorrow’s slew of economic releases including durable goods, consumer confidence and new home sales will provide new numbers to evaluate the nation’s upbeat macro profile. However, with the recent Reuters/Michigan consumer confidence unexpectedly sliding for March amid a lack of clarity on the fiscal front, traders should keep an eye on tomorrow’s consumer confidence data to gauge whether it betrays similar concerns. This week also sees the release of final fourth quarter GDP data, which is likely to be revised upwards.

Euro – European Markets

After a prolonged period of dilly dallying, Cyprus secured a bailout agreement with its international lenders, thereby putting uncertainty at bay for now. The Euro moved higher against the majors and for a brief period breached the 1.30 mark against the US Dollar as a financial meltdown was averted in the east Mediterranean island. The agreement calls for splitting the Popular Bank of Cyprus, or Laiki Bank, into a “good bank” that would be folded into Bank of Cyprus and a “bad bank” that would eventually be closed down. The deal helped in protecting depositors with deposits under €100,000, while those over €100,000 would be frozen and used to pay off debts at Laiki and recapitalise Bank of Cyprus. Further providing some relief to the Cypriot economy, a senior European official indicated that the nation would be able to receive the first tranche of aid in early May 2013. Though the agreement has dealt with short term uncertainty, the business model of Cyprus as an offshore financial centre which drew large amount of money from rich Russians and Britons is being questioned. In a move to protect Greek depositors, Greece's Piraeus Bank struck a deal to take over Greek branches of Cypriot’s troubled banks, leading the Euro to strengthen against the greenback in Friday’s trading session.

Other Currencies – Highlights

The Japanese Yen has steadily declined against high yield currencies this morning after Cyprus averted a disorderly default and unprecedented exit from the Eurozone by accepting the demands from Troika in exchange for a bailout. On the domestic front, consumer inflation data due later this week will be closely followed, to decipher whether the nation is showing any signs of overcoming the prolonged period of deflation. A further decline in consumer prices would likely prompt the new BoJ Governor to adopt aggressive monetary stimulus measures in their meeting scheduled next month, thereby proving negative for the currency in the near term. Additionally, a raft of macro data including retail sales, manufacturing PMI, employment and industrial production also feature on this week’s economic calendar. Although domestic cues remain the key factor in determining the trend for the Japanese Yen during this weekly trading session, a barrage of important economic releases across the Atlantic will also likely have an impact on risk appetite among traders.