Wise money markets buoyed by data releases

A combination of better than expected Chinese export growth and German Industrial production has boosted appetite in the markets and led to euro/ US Dollar driving higher yesterday.
Wise money markets buoyed by data releases
In addition overnight it has been confirmed that Australian employment data came in hugely better than expected again boosting risk appetite and leading to gains in the AUS Dollar in early trade.

In other news the NZ Dollar fell after the central bank confirmed that they intervened last month to protect the NZD from further appreciation.

However with interest rates still high compared to the west at 2.5% and limited ability to intervene on a large scale the NZD is not expected to depreciate too much but the move will make speculators think twice before going long NZD.

Elsewhere the Polish Zloty gained ground after the central bank cut interest rates in a surprise move to try to boost growth.

The focus for today will be on the Bank Of England interest rate decision, however it is not expected that we will see any change to interest rates or to QE which will hold at £375 billion.

The recent uptick in economic data in the UK through PMI and GDP coming in better than expected underlines the reasoning to hold firm.

We also have industrial and manufacturing production data due out of the UK this morning which is expected to be weaker than previous releases. From Europe we have the ECB monthly report which although not likely to surprise will be eyed just in case and finally we have US jobless claims which are expected to show an increase in claims.

Euro rallies on economic data

The euro has rallied to a high of 1.3130 following German Factory Orders which surprisingly rose a further 2.2% in March, coupled with rumours that Portugal will auction 10-year bonds for the first time since the 2011 bailout amidst easing finance costs in Europe.Euro rallies on economic dataNevertheless, it appears as though the powers that will be working under the single currency are becoming gradually more dependent on monetary support as Spanish Prime Minister Mariano Rajoy requests the European Central Bank (ECB) to announce extra packages to support small businesses, while Euro Group President Jeroen Dijsselbloem said the region needs more tools to recapitalise commercial banks as the ECB plans to conduct asset-quality review of financial institutions.

Following comments from Mario Draghi last Thursday, it appears as though the ECB are ready to firm up the ailing economy; we should see the Governing Council continue to embark on its easing cycle over the coming months and the central bank may show a greater willingness to apply negative interest rates in the euro-area as the region struggles to return to growth.

Therefore, the ECB monthly report due out Thursday may fuel speculation for additional monetary support, and the EURUSD remains poised to face additional headwinds over the near to medium-term as the outlook for growth and inflation remains weak.

Finally, back to the UK the Pound has found a catalyst by the better than expected GDP number which eradicates some of the short term fears regarding a triple dip recession.

Attention will now turn to the NIESR (National Institute of Economic & Social Research) estimate of GDP for April for further clues on the state of the UK economy.

The Bank of England Interest rate decision will also be a key event. Recently there has been the view that more QE could become available but as yet we have failed to see it. If we this were to be announced expect rates to be pretty choppy following this news.

These data outcomes along with Industrial and Manufacturing results will shape Sterling’s performance for the rest of the month.

ECB cuts interest rates

The big news yesterday was Super Mario-  ECB chief, dropping interest rates by 25 basis points at the ECB monthly meeting.ECB cuts interest ratesThe move was widely expected in the market which is why there was not a huge reaction in the aftermath, with GBP/EUR nudging up 60 pips or so. The larger move was EUR/USD which after trading over 1.32 came back to just over 1.30.

I think the market was hoping for more details on how the ECB will help to extend to credit to SME’s across the euro zone, but as usual Mario talked a great deal with zero content, I guess we will find out more about the plans in planned speeches and press leaks during this month.

In terms of the euro moving forward, the rate cut should allow GBP to push towards the 1.20 level over the next couple of months. This should be accelerated by today’s non-farm payrolls which are expected to be softer than originally forecast.

The Dollar has in recent months begun to trade like a normal currency, away from the Risk-on/risk-off paradigm that dominated US Dollar trading over the past few years. That is why a disappointing NFP number should see the Dollar weaken slightly, however don’t be surprised to see GBPUSD ramp up as we move towards the number.

Eurozone PPI is also due this morning at 9am – recent individual country PPI’s have been dire so expect the theme to continue with currency area wide number as well.

Euro continues to fall

Growth fears have returned following the disappointing data from the US and China coupled with downward revision to global growth forecasts by the International Monetary Fund.

Euro continues to fallIn Europe, PMI and the German IFO business sentiment assessments will expose some additional moderation, while the credit environments remain constrained representing a downbeat outlook over the rest of the year.

Therefore pressure for a policy rate cut from the European Central Bank is likely to strengthen, with a cut likely by the end of this quarter. EUR/USD continues to trade above its 1.3001 technical support level however, drive is fading. Weaker economic data this week will likely undermine the EUR further.

Data releases this week will not do much to dispel growth fears. Whilst the advance reading of Q1 US GDP is expected to show a firm 3% annualised result, the drive in the US economy clearly ran out of steam at the end of the quarter recent releases demonstrate.

The US and global economy is likely to recover throughout the year but undeniably recent data releases point to a similar pattern as recent years of firm Q1 activity followed by weakness later.

After last week’s volatility in commodity and gold prices, in particular some stability is likely over coming days, with gold retracing some of its losses and recovering the USD 1400 level.

Equity markets finished lower yesterday erasing early gains after U.S. Construction company Caterpillar cut its forecast, hurting UK engineering stocks but the plethora of US Q1 earnings scheduled over coming days will help to determine whether the stocks can recover.

Currencies were certainly the hot topic at the G20 meeting however the final upshot left the door open to further JPY weakness while the statement highlighted the “unintended negative side effects” for easier monetary policy.

While this was an indirect warning about potential build-up of asset price bubbles as central banks ease policy, it is questionable whether one can influence the Bank of Japan from accelerating its balance sheet expansion. Aside from a probable break of USD/JPY 100, there is unlikely to be much follow through from the G20 meeting this week.

Cyprus bailout deal leaves wise money markets unconvinced

The Cyprus crisis continues even though the bailout has been agreed.Cyprus bailout deal leaves wise money markets unconvincedIn a measure that was reached, they have come to a conclusion that all deposits of over € 100,000 will be hit by losses of over 40 percent as those under the mark will remain safe.

This has spooked markets moving them into negative territory throughout the region with almost every European Index plunging, as Cyprus heads into its 12th straight day of bank holidays, amidst concerns that most people will try and move out their funds in large numbers and would prefer to hold cash.

The negative sentiment is also enhanced by rumours that this format will be adopted as a template for any further bailout schemes.

Although top officials deny any such move in the future, markets are still wary that this format will leave the banks with fewer deposits and in turn will allow them to lend less, shrinking growth.

The euro as a currency has taken a hit and trades this morning at a rate of 1.2825 against the Greenback.

Meanwhile, there are also reports from Spain, that economic climate in the country will further deteriorate this year and shrink by 1.5 per cent.

Over to the US, where there was a glimmer of good news for US equities after figures showed orders for US durable goods rose by 5.7% in February whilst housing data also demonstrated a steady rise in prices.

Markets are fairly positive that the world’s largest economy is finally starting to experience some steady growth following years of stagnation.

As per February’s slump in consumer confidence, most people are still concerned on the Budget talks that continue in Washington.

However, the US dollar has managed to maintain strength as investors look to it as a safe haven with the on-going turmoil in the eurozone.

The positive US data releases, has done little to cheer up Sterling, as the currency was unable to cash in.

Retail sales in the UK for March were flat compared with a year ago as per the Confederation of British Industry, and the GBP/USD pair traded between a range of 1.5134 – 1.5206.

Cyprus jumps into bed with Russia- and bounces straight back out again

The Cyprus saga continues to dominate euro trading, but there looks to be an end in sight after Cypriot finance minister Michalis Sarris left Moscow without a Russian backed deal in place.Cyprus jumps into bed with Russia- and bounces straight back out againWhether a deal was ever on the table or was simply a bargaining tool by the Cypriot government is unclear, but not even an extension to a €2.5 billion loan was agreed, the very minimum hoped for.

Today the Cypriot parliament will vote on proposals to restructure the two largest banks imposing up to a 40 per cent tax on deposits over €100,000 according to reports this morning.

Under the 100,000 mark are expected to be protected. With Banks closed until Tuesday a ‘no’ vote today would not be the end of the world, but would certainly test the patience of its Troika paymasters which is already at breaking point after an initial deal was rejected and Cyprus tried to hop into bed with Russia.

In fact German Chancellor Angela Merkel stated Monty Python style in parliament this morning that Cyprus is a very naughty country indeed. We can expect this to go down to the wire. The euro will remain under pressure until a deal is in place.

Away from the eurozone and the debate over Wednesday’s budget rumbles on, mostly over government backed guarantees for mortgages and a relaxation of planning law’s.

You get the feeling George Osborne would happily have cancelled this year’s budget, but obliged to say something he trotted out the very minimum possible.

Sterling was relatively unaffected by a fairly bland fiscal budget overall, so we’ll leave it at that.

More importantly Mr Osborne did announce new powers for the Bank of England, including forward guidance and the Banks new powers that will dictate the path of the Pound over the coming months.

Next week should be a busy one with the early part taken up with a bail-out of Cyprus (hopefully). US durable goods orders and consumer confidence follow midweek and finally German unemployment on Thursday.

Cyprus rejects EU bailout- as euro exit feared

Wise money markets have opened this morning, in turmoil, as the Cyprus crisis continues to drag on, weighing heavily on the eurozone.Cyprus rejects EU bailout- as euro exit fearedThis comes after the country’s parliament rejected the bailout plan that was to levy banks with a deposit tax of 6.6 percent on deposits under €100,000 and 9.9 per cent above the mark, to make up € 5.8 billion, as aid.

Although politicians tried to soften the blow, by pushing for no tax on the smaller accounts and up to 15 percent on the larger deposits, there was not a single vote in favour of the package.

All 36 votes declined the package while 19 votes were abstained.

Cyprus’ finance minister flew into Russia to ask for aid, in keeping with their vested interests of higher value depositors. For the time being though, while a ‘Plan B’ is discussed, the ECB is keeping markets steady, as Cyprus extends their bank holiday by another day to avoid funds being transferred out of the country rapidly.

If Russia does not provide the aid, with the Eurozone leaders adamant not to sanction further funds, it could be a very volatile time for the markets as there could be a possibility of a Euro exit or a very strained relationship for Cyprus with the eurozone.

We are currently just above the 1.29 mark on EUR/USD.

In other news, we had ZEW economic surveys for Germany which came in at 48.5 and the economic sentiment for the Eurozone which was at 33.4.

In the wake of all the turmoil, German numbers continue to strengthen while other European numbers stumble.

Over in the US, housing permits came in better than expected at 4.6% but the figure has done little to cause any volatility in the markets.

From the UK, we expect employment figures later this morning. Also, it was reported that UK inflation accelerated to the fastest pace in nine months in February.

As higher energy and rising fuel prices continue to squeeze consumer spending, the UK is braced for another austerity budget by George Osborne today, along with the Bank of England minutes.

Cyprus dominates the wise money markets

In Asia trading the wise money markets move was driven from the ‘fear gauge’ spiking in the wake of increased risk aversion.Cyprus dominates the wise money marketsFollow through looks limited, however. Investors seem calmer as the fear following the news of levy of bank deposits in Cyprus as part of a €10 billion bailout for the country, eased.

No sign of bank runs elsewhere in the Eurozone and the go ahead to make the deposit levy more progressive (ie a higher levy on bigger deposit holders) while retaining the total amount at around EUR 5.8 billion, have helped to calm pressures.

Nevertheless, today’s delayed vote in Cyprus’ parliament to authorise the levy could incite more tension particularly as the result is too close to call.

Therefore the spot light will remain firmly on developments in Cyprus, with economic data taking a back seat.

The highlights on the data front include likely gains in the German March ZEW investor confidence survey and US February housing starts and building permits.

Currency volatility appears to be restricted ahead of the Cyprus vote and then the Fed FOMC outcome tomorrow.

The Single European currency remains the weakest link, with gains in the currency likely to be sold into although support around EUR/USD 1.2876 is likely to hold if the Cyprus vote flops to recommend the deposit levy.

If this is the case, expect further sharp pressure on the Euro and a much bigger drop in the currency and risk currencies overall. European and Cyprus officials would have to return back to discussions but during the period of uncertainty panic would arise.

The Reserve Bank of Australia minutes released overnight maintained that the door remains open for further policy rate cuts although they did note that the economy is responding to previous cuts with the impact having further to run.

There is little in the minutes to suggest further easing is imminent. The RBA minutes are unlikely to dent the Aussie which remains buoyant having managed to remain well supported even despite the Cyprus panic.

EU bails out Cyprus

The European Union has finally provided a 10 billion euro rescue package to the Cyprus government with the majority of the bailout going to two of the largest Cypriot banks.EU bails out CyprusHowever the EU has requested that Cyprus mobilise internal resources meaning that a one off levy will placed on residents and non-residents depositors, as without this the bailout, it would leave an unsustainable level of GDP-debt ratio which could soar to 145%.

This has caused the euro to weaken this morning against a basket of currencies primarily US Dolar and the GB Pound however the rally has already started show signs of retracement.

The EU has also shown that it may be willing to adopt expansionary fiscal policy to help boost growth, this was pushed forward by France, Spain and Portugal while Germany,

Austria and Finland had called for further austerity. The compromise was short-term targeted measures to help boost growth and tackle the high unemployment.

The UK chancellor is due to release the UK budget on Wednesday with little change expected despite the recent weak economic data, the markets will be looking as to whether the chancellor mentions a change in the Bank of England’s mandate such a move should cause sterling to weaken further.

The monetary policy committee minutes are due out on Wednesday which will be looked at closely to ascertain the current bias towards an increase in QE.

In the US, strong data has continued with retail sales increasing despite the tax hikes that have taken 1.5% out of households disposable income alongside an improving job market seen from the strong US jobs report released earlier in the month.

The FOMC meeting is on Wednesday where it is expected that Bernanke will reiterate that the economy is still on the road to recovery and that the labour market is still not at the required level to suggest an exit from QE, further enforcing this by stating that the risks of continuing the current QE program outweigh the potential costs.

Euro watches Italian bond auction with caution

In what is a quiet start the day in the European session investors will be looking for impetus from German CPI figures which are likely to confirm year-on-year inflation rate at 1.5 percent, the lowest since 2010.Euro watches Italian bond auction with cautionThe recent soft price growth allows the European Central Bank room to introduce stimulus, to counterbalance the Eurozone downturn.

However the ECB appears unlikely to act whilst political instability in Italy dents its policy agenda.

As a result, the data’s influence on the single European currency is likely to be restricted and therefore a bond auction of one year Italian bills could be of keen interest.

A rise in typical yields or a major fall in the bid-to-cover ratio, a measure of demand, will suggest a return to growing sovereign risk jitters and could weigh heavily on the Euro.

Meanwhile, UK Industrial Production is seen posting a nominal 0.1 percent monthly increase over the same period.

A release accurate with projections would fall in line with recent trend averages, presenting little direction to traders on future BOE policy and Sterling could survive unscathed.

Priced-in stimulus bets have been swelling over the past five weeks and Sterling has duly declined. Speculative positioning is at its most net-short in four months, suggesting prices may be susceptible to an improvement with any positive news.

Continuing the UK theme and house sales hit their highest level in more than two-and-a-half years last month but we should not assume we are at the start of a housing boom, according to the Royal Institution of Chartered Surveyors (Rics).

They expect a rise in future sales and despite inquiries from prospective buyers had remained stagnant since January’s cold weather.

The market has undoubtedly been supported by the Funding for Lending scheme, which was intended to boost lending by offering low-priced funds to mortgage and loan providers.

Nevertheless, the number of sales is still about half the total seen in 2007 before the financial crisis hit, according to figures from HMRC.

The market has had little impetus in recent years, although a number of government systems have supported the market for new homes. However the problem remains that borrowers find it tough to obtain the deposit necessary by lenders to secure a home loan.