Turmoil in Cyprus pushes investors away from risk as Euro loses recent gains
19/Mar/2013 • Currency Updates•
Yesterday sterling closed broadly higher against the euro but maintained sideways momentum against the dollar, trading in a narrow range. George Osbourne remained bullish about his approach to fiscal policy stating that to “abandon austerity would drive the UK straight to a disaster”. The pound strengthened significantly against the euro, largely down to concerns in debt markets as renewed turmoil in Cyprus put the shared currency under pressure.
Yesterday, the Right Move House Price Index was the only important macro data released, with a slight increase of 0.1% from its previous of 1.1%. This Index is important because provides a sample of residential property prices in the UK and it shows the strength of the UK housing market. The FTSE 100 dropped marginally by -0.49%.
For today, the two most important inflation indicators will be released in the UK. CPI is expected at 2.8% (YoY), higher from a previous 2.7%, and PPI is expected at 1.1% (YoY), lower from a 1.4% previous.
Sir Mervyn King said on Friday in a TV interview that he thinks “momentum” is building within the economy and that this will become apparent during the course of the next year. He added that he felt sterling had fallen enough to help aid UK exports and that the central bank was not trying to devalue the currency any further. The market will be looking to George Osbourne’s budget tomorrow for further clues on tools that will be given to the BOE to stimulate growth.
Yesterday saw renewed turmoil in sovereign debt markets with the euro being driven back to 4-month lows early on, but recovering almost half of the drop during yesterday’s session. This indicates markets are concerned about a new bailout in Cyprus, but are not in panic-mode as main equity indexes decreased an average of 0.4%.
With regards to Cyprus, a bailout has been widely anticipated for months; however the structure of it, particularly the levy on deposits, has proven to be a negative surprise to the markets. A €10bn bailout accompanied by an increase in corporate tax and a bank deposit levy (set at 6.7% for deposits below €100k; 9.9% for deposits between €100k and €500k; and 15% above €500k) will be voted in parliament today, with many analysts expecting initial measures to be watered down.
A peculiar fact of Cyprus is that it has been a favoured destination of Russian funds due to its lax banking compliance and lack of regulation. Estimates show that there is in excess of 20 billion euro in Russian deposits. The threat of deductions has brought Russia to loggerheads with the EU with cold war undertones. The path Cyprus has chosen and the risk of a bank run has increased contagion fear, increasing yields thus making peripheral European bond markets more vulnerable. This has also sent German 2‐year bond yields back down to 0.0%.
The US Dollar Index moved higher as traders looked to shed risk and move into safe haven assets. The move was catalysed by worries about the reaction to the bank tax forced on Cyprus and market jitters were felt in the equity indexes with the S&P 500 tumbling.
Housing starts and building permits are due today, with an expected better than previous data that will enhance confidence in the health of the US Economy.