New US economic data and central bank policies in the US and Japan are in focus today as the Cyprus bailout and unknown fallout from it fades slightly. Meanwhile, rumors begin about another Eurozone debt crisis in the making.
With the lack of freshly negative headlines out of Cyprus and mixed US economic reports, currencies are trading cautiously today. The economic calendar was heavy with US data and there were both surprises and disappointments.
For the Federal Reserve, the lack of consistent improvements in the economy is one of the main reasons why weaning off quantitative easing (QE) is a long-term discussion. Thinking about an exit is the right thing for the Fed to do, but the central bank is still miles away from acting on it.
Of all the economic reports released today, consumer confidence is the most important, and unfortunately, the Conference Board's index dropped from 68 to 59.7 in the month of March. This decline was consistent with the deterioration reported by the University of Michigan and Investor’s Business Daily, both of which cited concerns about labor market conditions and the sequester. Weaker confidence could weigh on consumer spending at the end of the first quarter.
New home sales also dropped 4.6% in February, but this decline represents a correction after the sharp 13.1% rise in January. The beginning of the year was a good one for the labor market, with housing prices rising 1.02%, according to S&P/Case-Shiller housing price index. This was the strongest increase since June 2006.
Durable goods orders also jumped 5.7% in the month of February. This increase was more than anticipated and was driven largely by a 95.3% rise in commercial aircraft orders. Demand for autos also rose 3.8%, but excluding transportation orders, durable goods fell 0.5%. Durable goods can be extremely volatile, and therefore, we caution traders against reading too much into these numbers because the changes this month mostly reflect a payback from last month.
Rumors Swirl About Yet Another Eurozone Bailout
Meanwhile, the euro hasn't budged because the deal between the Eurogroup and Cyprus has not resolved all of the unknowns. Depositors with accounts over EUR 100,000 still don't know exactly how much they will lose, all banks are closed until Thursday, and capital controls could remain in place for weeks and possibly even months.
There's also been talk that Slovenia, whose yields spiked up to 5.4%, could be the next Cyprus, but with a debt-to-GDP ratio of only 52.7% and bank deposits accounting for only 125% of GDP (versus 800% in Cyprus), we agree with the European Central Bank (ECB) that the contagion risk for Slovenia is minimal. Nonetheless, we need some good news for the EURUSD to rally as traders wait for banks in Cyprus to reopen on Thursday.
See related: All-New Headlines Dragging Down the Euro
Bank of Japan’s Kuroda Makes a Surprising Splash
Overnight, USDJPY received a boost from new Bank of Japan (BoJ) Governor Haruhiko Kuroda. During his Parliamentary testimony, Kuroda sounded optimistic about the economy and committed to easier monetary policy. He said the economy has stopped weakening and showed positive signs of improvement.
The weaker yen helped to boost corporate and household sentiment, but uncertainties are high for Japan's economy, and therefore, the BoJ will need to do whatever it takes to end deflation. More specifically, the central bank plans to discuss different ways to lower the yield curve, including extending bond maturities in their asset fund along with increasing purchases of long-term bonds. He expects to achieve the 2% inflation goal in two years, but admitted that they may not be able to accomplish this goal through monetary policy alone.
See related: 3 Reasons for Near-Term USD/JPY Losses
By Kathy Lien of BK Asset Management