Cyprus Bailout Euphoria Fades

Although markets rejoiced at the last minute deal to rescue Cyprus, the initial optimism soon faded after details regarding the nation’s rescue package emerged. With uninsured depositors and bondholders set to bear the brunt of the bailout, Eurogroup head, Jeroen Dijsselbloem, indicated that the deal may set a precedent for countries which may have to restructure their banking sector. With broader economic indicators from the US suggesting a buoyant recovery is in progress, a raft of economic releases will be closely eyed for more clarity on this front. Meanwhile, the CBI’s retail sales data in the UK later today will be monitored for latest trends in the economy.

Pound Sterling – UK Markets

The release of dismal BBA mortgage data led Sterling to backtrack against the US Dollar yesterday. Britain's mortgage lending climate took a beating amid a lack of confidence and an urge among home owners to increase repayments on their mortgages, thereby raising doubts over the efficacy of the BoE’s lending scheme to unblock the credit pipeline. With the FLS scheme having limited impact on credit, it remains to be seen whether the central bank considers introducing a better targeted version of FLS to bring in more demand. However, downbeat comments by the Eurogroup head dampened risk appetite and helped the Pound to garner traction against the Euro yesterday. In the midst of ongoing global economic crisis, the BoE Governor, Mervyn King, stated that many unexpected “twists and turns” would likely occur before the global economic crisis can be safely declared over. With the Pound looking for direction against the majors in today’s trading session, markets are keeping an eye on the CBI reported sales to decipher whether February’s rebound in retail sales was just a one off event. Tomorrow’s final fourth quarter GDP reading is also likely to garner market attention.

US Dollar – US Markets

A buoyant set of US economic data saw a muted response after Jeroen Dijsselbloem’s warning spooked investors, leading the greenback to nudge higher against the Pound and the Euro in yesterday’s trading session. Meanwhile, the Fed Chief, Ben Bernanke, defended the central bank’s policy stance and indicated that the accommodative stance would assist world economies. On the domestic front, data out yesterday revealed that manufacturing activity in both the Chicago and Dallas region ticked higher for February, thereby signalling that the US economy is maintaining its path to recovery. With manufacturing activity gathering pace, its remains to be seen whether today’s durable goods and Richmond manufacturing activity data shows a similar trend. However, the New York Fed Chief, William Dudley, warned that fiscal policy would likely remain a drag on the economy in the near term. Against this backdrop, consumer confidence data would likely grab focus in today’s trading session. Markets would also keep an eye on new home sales data to watch whether the rise in building permits and housing starts reported last week is being reflected in today’s numbers.

Euro – European Markets

After markets gave the thumbs up to the Cyprus bailout, investors once again flocked to safe haven currencies yesterday after Eurogroup head, Jeroen Dijsselbloem’s downbeat comments on Cyprus' aid package rattled global financial markets. The single currency slipped below the 1.29 mark against the US Dollar yesterday after the Eurogroup head indicated that terms imposed on Cyprus would be the template for countries seeking a bailout. However, he back tracked later and indicated that Cyprus was a “special case” due to the nation's oversized banking sector. The Euro has taken a breather against the majors in today’s trading session ahead of an Italian bills auction scheduled later today. In the midst of ongoing political turmoil in the nation, it remains to be seen whether Italy clears today’s bill auction hurdle with ease. A plethora of Eurozone confidence indices due tomorrow will shed light over the near term economic outlook of the Euro region. Additionally, tomorrow’s preliminary Eurozone consumer price inflation data would be closely watched for insights into the ECB’s future monetary policy moves.

Other Currencies – Highlights

The Kiwi Dollar has remained in a tight range against the US Dollar in today’s session, as risk appetite remained tempered despite buoyant trade balance data from New Zealand. Data revealed that New Zealand’s trade balance unexpectedly swung to a surplus for February underpinned by improving exports on account of robust demand for products from China. In today’s trading session, market participants are expected to keep a close watch on a flurry of economic releases from the US scheduled for release later today in order to gauge the risk appetite among market participants. Besides, business confidence data in New Zealand due tomorrow remains a key event on traders’ radar in order to attain further insights about the health of the Kiwi economy. Apart from confidence data, there is not much for the New Zealand Dollar on the domestic front during this week. Therefore, we believe that external cues would also play a pivotal role in determining the direction of Kiwi Dollar against the majors.