Euro: How Will the Markets React to the Cyprus Bailout?

Dollar Takes a Critical Turn Into Weekend, Key Fed Decision Ahead
Euro: How Will the Markets React to the Cyprus Bailout?
British Pound Responds to Material Shift in Stimulus Hopes
Japanese Yen Traders on Alert for News of ‘Emergency’ BoJ Meeting
New Zealand Dollar Looks to GDP Reading to Confirm RBNZ Fears
Australian Dollar: Rate Outlook Improves but Watch Demand
Gold Volume Collapses, Volatility Near Record Low as Metal Flatlines

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Dollar Takes a Critical Turn Into Weekend, Key Fed Decision Ahead
The Dow Jones FXCM Dollar Index (ticker = USDollar) suffered a considerable, bearish blow through the end of this past week. A drop for the greenback on Friday insured the shift in momentum was felt by the market. For the USDollar Index, the slide ensured a red close through the end of the week – bringing an end to the record-breaking eight-week climb that preceded the drop. Furthermore, we have seen the tentative follow through stoke serious reversal threats for key major pairings like EURUSD above 1.3000, GBPUSD above 1.5000 and USDCAD below 1.2200. Given the dollar’s advance in spite of the positive bearings in risk trends, there is certainly a lot of room the benchmark currency to retreat. However, direction and momentum depend on two, other serious fundamental threats: risk appetite and the Fed rate decision.

Looking back over the dollar’s more than 5 percent advance since the beginning of the year, the most remarkable aspect of the drive is its conflict to traditional fundamental trends. As the world’s favored safe haven, the dollar would normally drop as benchmarks like the S&P 500 (sensitive to speculative appetites) advanced. The currency’s slide through the second half of this past week looks like it is attempting to close that gap. However, if there is anything more fundamentally mispriced than the dollar it would be positioning in ‘risk’ itself. The Dow equity index’s epic, 10-day straight advance – the longest run in 16-year years – came to an end with Friday’s slip; but that does not immediately signal a shift in confidence. Sentiment can be redefined by a range of possible catalysts, but the most potent spark is risk’s own support: stimulus.

On Wednesday, we are going to revisit a topic that caused a considerable stir back in late January – framing expectations for the inevitable downshift and/or end in the Fed’s extensive stimulus regime. More than just the regular Federal Open Market Committee’s policy decision, this March meeting will also carry with it the policy body’s forecasts for growth, inflation and interest rates as well as Chairman Ben Benanke’s testimony. There is very little chance that we will see the finish line on monetary easing next week, but we don’t need to. Speculators are looking for any hint of the approximate end to the influential program. After the drop in the jobless rate to a 4 year low, it may come before 2013 ends.

Euro: How Will the Markets React to the Cyprus Bailout?
Yet again we were delivered a critical weekend update from Europe. And, this one is just as troubling – if not more – than the news of a gridlocked Italian government and downgrade for the United Kingdom. Extending their discussion through Saturday morning, European Union officials finally emerged with a deal for Cyprus’ bailout. The €10 billion in assistance the EU members and IMF initially reported was smaller than the €17 billion officials said was needed to fill the void the country’s financial system was facing, but they had a plan to compensate. In a remarkable upgrade to the region’s ‘crisis fighting’ toolkit, Eurogroup President Dijsselbloem announced that a ‘bank levy’ will be placed on foreign and domestic deposits. The 9.9 percent levy on accounts over €100,000 and 6.75 percent below that mark is a bold step in the Eurozone’s ongoing financial fire fight. As much as this can close the gap without promoting further ire from taxpayers in other countries, it can potentially spark a panic amongst investors and citizens in the region. Regardless of Cyprus’ size or influence in the economic and monetary union, a dangerous precedence could be interpreted in this move. Despite vows that this was a unique situation, what is the likelihood that this could be an option in Greece if ‘regular’ measures keep falling short? Could it be an option for a ‘core’ member? Watch the Euro on the open.

British Pound Responds to Material Shift in Stimulus HopesFear of a impending wave of stimulus has driven the British pound sharply lower against the US dollar and Euro these past few months, but how realistic are these concerns? This past week, Bank of England (BoE) Governor seemed to back off the pressure when he said the pound was close to fair value (even if he did say there was justification for further easing). Moving forward, we have critical reads on the stimulus expectations. Chancellor Osborn will present the 2013 budget which many think will also carry a remit for the BoE. Watch the docket.

Japanese Yen Traders on Alert for News of ‘Emergency’ BoJ Meeting
The yen has dropped nearly 25 percent against the benchmark dollar over the past six months on expectations. Threats and warnings of a massive stimulus program that would rival the terrible might of the Fed’s Quantitative Easing (QE) moves finally forced the market to take Japanese policy officials’ warnings seriously. Now, it’s time for the central bank to put its money where its mouth is. On Tuesday (March 19), BoJ Governor Shirakawa and his two Deputy Governor step down to be replaced by Kuroda and his two lieutenants – policy drivers the lot of them. Given their level of talk, there is no doubt expectation of an immediate satisfaction to speculative assumptions. And if they don’t…

New Zealand Dollar Looks to GDP Reading to Confirm RBNZ Fears
This past week, the Reserve Bank of New Zealand hit its currency where its fundamental value lies – the yield. When Governor Wheeler said that he expects rates to be held through 2013 and that the kiwi dollar is 10-15 percent overvalued, he undermined the true appeal of a currency that is otherwise out of its depth amongst the majors: its investment value. The RBNZ shifted the outlook for the next move to be a rate hike to a rate cut. Now, we will look at indicators like the 4Q GDP reading due late Wednesday for its ability to further the need for easing.

Australian Dollar: Rate Outlook Improves but Watch Demand
With the strong employment data this past week, we have seen the interest rate outlook for Australia finally stabilize. The cumulative 9 basis points of easing seen over the coming 12 months through swaps is the most restrained we have seen since July 2011. What matters now is measuring actual demand. We can do that by watching the 10-year bond auction on Wednesday and action in the secondary bond market.

Gold Volume Collapses, Volatility Near Record Low as Metal Flatlines
Volume floundered for gold this past week – posting the weakest pace of turnover so far this year – as the metal once again failed to make meaningful progress. The CBOE’s Gold Volatility Index is just off series’ lows and net speculative futures interest is holding near multi-year lows. We need a catalyst. News that the Fed is heading for an exit would be gold bearish, but BoJ stimulus or Euro-area financial fear is bullish.

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