Cyprus Scrambles to Prevent Run

With the week grinding to a close, all eyes will remain fixed on events unfolding in the Eurozone. Cypriot reopened today for the first time in almost two weeks under tight controls to prevent the possibility of a run on Cypriot banks. Italian long term borrowing costs climbed, as traders remained worried, given the nation’s failure to form a stable government. The US GDP figure remains a key highlight today, investors are anticipating an upward revision for the fourth quarter. Back in the UK, data showed that consumer confidence remained unchanged for March.

Pound Sterling – UK Markets

The Pound lost ground against the US Dollar yesterday as a dismal current account report renewed concerns surrounding the British economy. A substantial decline in overseas investments pushed the nation’s current account deficit for last year to the highest level since 1989. Additionally, reports of capital shortfall within UK banks to the tune of £25 billion also weighed on the performance of Sterling. However, Sterling has managed to gain traction against the common currency in today’s trading session, as traders stay cautious in the midst of prevalent financial woes surrounding the Cypriot banking system. Meanwhile, with macro indicators remaining soft over the month, Gfk revealed that consumer confidence in the UK remained weak for March, as inflationary pressures and a sluggish economic recovery hampered consumer morale. Moreover, Nationwide house prices data released earlier today came in worse than expected for March, thereby increasing risks of the economy registering a negative growth this quarter. In this context, PMI releases due next week would be closely watched to unearth a clearer picture of the British economy.

US Dollar – US Markets

Lingering concerns in Italian political arena and worries surrounding the reopening of Cypriot banks have prompted traders to remain on the side lines, leading the US Dollar to strengthen against the Euro in today’s trading session. Data released yesterday also has cast some doubt over the recently released buoyant US housing data, as figures revealed a decline in pending home sales amid tight supply in the housing market. Meanwhile, markets today await the release of revised fourth quarter GDP data which is likely to show that the nation’s economy expanded at a faster pace in the fourth quarter. However, few Fed members have expressed reservations over the central bank rushing to scale back its stimulus programme amid improvement in the economy. With influential Fed policy members continuing to confound market participants with their views on the central bank’s current monetary policy stance, initial jobless claims data due later today would be keenly eyed for cues on the labour market outlook. Chicago and Kansas manufacturing activity data also remain on traders’ radar ahead of the all important ISM manufacturing activity data due early next week.

Euro – European Markets

Poor bond auctions amid political uncertainty in Italy, coupled with Cyprus reopening its banks later today under tight monetary controls, prompted traders to shun high yield currencies. The single currency has lost steam and is trading below the 1.28 mark against the US Dollar in today’s trading session. Political impasse in Italy caused bond yields to rise amid subdued demand at the bond auction held yesterday. Further adding to woes, Moody’s lowered its assessment of the highest rating it can assign to a domestic debt issuer in Cyprus, citing increased possibility of the nation exiting the Euro area. Moreover, it kept Portugal on a “Negative” outlook, amid high government debt level and the nation’s vulnerability to shocks emanating from the regional debt crisis. With peripheral Eurozone economies struggling, the core also seems to be infected as data released earlier today indicated that number of unemployed people surprisingly rose for March. The same downbeat assessment was also visible in yesterday’s dismal Eurozone confidence indices. With little in store today, we believe that developments in Cyprus are likely to have a bearing on risk appetite.

Other Currencies – Highlights

The Canadian Dollar erased its earlier session losses and nudged higher against the US Dollar yesterday after data revealed an unexpected jump in Canadian consumer price inflation. Consumer prices rose at their fastest pace in more than twenty years for February. Against this backdrop, it remains to be seen whether the BoC policymakers adopt a hawkish stance in the near future. However, the Canadian Dollar is in a tight range against the greenback in today’s trading session as political uncertainty in Italy and simmering concerns over Cyprus bailout undermined demand for riskier currencies. Meanwhile, markets today keenly await Canadian GDP data for January to gauge whether the nation managed to recover following a contraction registered for December. Moreover, Canadian manufacturing PMI and unemployment data scheduled for release next week would also grab market focus to gauge the health of Canadian economy.