EUR: Cyprus a Risk but Focus Shifts to PMIs
AUD: Breaks Out of Consolidation on Hot Chinese Data
CAD: Retail Sales Expected to Rebound
AUD: Watch for Chinese Data
JPY Soars on Careful Comments from Kuroda
The better retail sales data yesterday provided a modest boost to GBP, but it hasn’t really changed the big picture view that the UK economy will continue to struggle, especially if the weakness in the Eurozone continues. It is still possible for EUR weakness to weigh on sterling. But for now Lloyds TSB would expect the recent 1.5027-1.5210 range to hold, with a break of either side more likely to be triggered by news form Cyprus than news form the UK.
Events in Cyprus are likely to remain at centre stage. It was announced yesterday that Cypriot banks will stay closed until Monday. Meanwhile, the ECB has raised the ante by stating that it will cut off emergency liquidity provisioning to the Cypriot banking system unless an EU/IMF bailout plan is agreed by then.
Weaker than expected euro area data added to market uncertainty yesterday. Flash PMIs for Germany, France and the euro area as a whole were considerably below their levels in February. Today’s German IFO survey will provide a further indication of the strength of economic activity. The survey does not always move in line with the PMIs or the ZEW survey released earlier this week, which in contrast pointed to an improvement in confidence in March. However, there is clearly a risk that the IFO data could also now disappoint. Weak data in Europe has led us to revise down our forecast for Q1 euro GDP growth. Lloyds TSB now expect a fall of 0.6% in 2013.
Unimpressive comments from new Bank of Japan Governor Kuroda and lower U.S. bond yields all contributed to the sell-off in USD/JPY. From a Yen perspective, the prospect of additional Quantitative Easing in April should limit losses in USD/JPY to its support level of 93 in BK Asset Management’s opinion but what really matters is the outlook for U.S. yields. Positive U.S. economic data and Bernanke’s optimism should drive yields higher but that may be difficult until the crisis in Cyprus is resolved. Investors are buying bonds across the globe in fear that the problems in Cyprus could lead to further weakness in equities and currencies. Nonetheless we still see USD/JPY recapturing its highs but the real test will be in 2 weeks when the new Bank of Japan Governor holds his first meeting.