Cyprus does what’s
necessary but the market remains wary
Cyprus has agreed a deal with the Troika which will
see them receive urgently needed loans amounting to €10bn. Though the measures
that are part of the deal are likely to leave the country in a prolonged economic
depression, disaster has been avoided as far as the wider implications of a
euro-exit are concerned. Eurozone-wide contagion appears to have been avoided,
for now at least.
The country’s second largest bank, Laiki Bank, will be
wound down, with its ‘good assets’ becoming part of the Bank of Cyprus. Large
depositors are likely to be hit and hit hard, possibly facing losses as high as
40% - much to Russia’s chagrin. In response, Russian PM Medvedev has bitterly questioned
the role that the EUR is to play in Russia’s currency reserves, though we don’t
attribute much substance to this.
The deal certainly hasn’t triggered a relief rally for
the euro, quite the opposite in fact. Meanwhile, data from the eurozone has
been poor again in the past week. The French, German and overall eurozone PMI
updates for March made for a sea of red. The recession in the region is
deepening and it is a concern to see German manufacturing dipping back into
contraction territory. Once again, this really puts the UK’s weak figures into
some perspective; we are not the only ones struggling. Unsurprisingly, the
latest German business sentiment update has also been hit by events in Cyprus.
MPC
minutes trigger some sterling positivity
Last week’s minutes blew the dust of some genuine sterling
demand, which was unexpected given the state of UK economic updates over the
course of February. Mervyn King was unable to add to the 3-member faction of
doves with the MPC, while perhaps even more significantly the minutes noted a
desire to avoid “an unwarranted depreciation in the pound.” Added to this, the
UK retail sales figure for February was excellent, revealing 2.1% growth, which
more than made up for January’s snow-hit start to the year.
The Fed’s QE3 outlook remains unclear
We know that the US recovery is taking decent shape
and we know that there is a substantial body of opinion within the Fed that
wants to begin winding QE3 down. However, we also know that Bernanke remains
cautious and needs to see further substantial improvements in the US labour market.
Nonetheless, Bernanke does appear to be setting the stage for an eventual
reduction in the pace of Fed asset-purchases, which should be a source of dollar-strength
by the summer.
End of week forecast
|
GBP /
EUR
|
1.1875
|
|
GBP /
USD
|
1.5200
|
|
EUR /
USD
|
1.28
|
|
GBP /
AUD
|
1.45
|
|
|
|
The pound is looking a little firmer across the board
in light of positive domestic developments and ongoing tensions in the
eurozone. Against the USD, we now see the recent dip below $1.49 as a temporary
base from which it will continue mounting a recovery. Losses in the EUR/USD pair
are likely to make it slow and limited progress on the upside, but we do expect
GBP/USD to see levels closer to $1.55 in the coming weeks. The picture for GBP/EUR
is also looking a little brighter, with a test of February’s highs above €1.18
a very likely development in the near-term.
Richard Driver
Currency Analyst
CaxtonFX
