• USD is broadly stronger on renewed European debt crisis
• GBP fell back against the USD as UK inflation rose to a nine-month high
• Commodity currencies fell as investors move towards safe haven assets
USD – The US dollar is broadly stronger, benefiting from safe haven flows, on worries of a renewed Eurozone debt crisis. Domestically, new US home construction rose in February and building permits climbed to the highest level in almost five years, adding to signs of progress in the housing market which in turn helps boost the economy. Builders broke ground on 917,000 homes at an annual rate, up 0.8 percent from a revised 910,000 pace in January. Building permits, a proxy for future construction, advanced 4.6% to 946,000, the strongest since June 2008. Encouraging housing numbers joined with safe haven flows have extended support for the dollar.
EUR – The euro fell against the USD ahead of a vote in Cyprus on a controversial bank deposit levy that has fuelled concerns of fresh Eurozone instability. A Cyprus government spokesman said a plan to levy taxes on bank deposits, crucial for the country to secure financial aid, was unlikely to be approved by parliament today. Cypriot and Eurozone officials have sought to soften the initially proposed levy of 6.75 percent on depositors of up to 100,000 euros and 9.9 percent above 100,000 to ease the burden on small savers. The House of Representatives was expected to meet at 1600 GMT. Rejection of the measure would effectively block a bailout that Cyprus needs to keep its banks afloat and the government paying wages and welfare. That would push the island closer to a default and a banking collapse that could have repercussions across the Eurozone.
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GBP – Sterling edged up earlier this morning against the dollar on higher inflation data and concerns about Cyprus but has slightly dropped over worries about the British economy and caution ahead of the annual budget. The pound’s brief uptick came after data showed annual inflation in Britain had risen to a nine-month high of 2.8% in February. The increase in consumer prices was driven by a mix of surges in household gas and electricity bills, and higher retail gas prices. Fuel prices showed their biggest monthly jump since January 2011. Although it may be argued that higher inflation could reduce the chance of more stimulus by the BoE, analysts still anticipate an easing policy in the near future given the bleak outlook on the British economy. Higher inflation could squeeze consumer spending which could lead to stagflation and threaten the economy further. BoE Governor Mervyn King and two other policymakers voted for a further 25bn pounds of bond purchases in February, and March. Voting records due tomorrow will show if anyone else will join them. If approved, the BoE could ease policy as early as April which could force the pound to weaken against the dollar in the near term.
JPY – The Japanese yen strengthened ahead of comments from the incoming governor of the BoJ, Haruhiko Kuroda, who takes office tomorrow. Alongside Kuroda’s plan to implement an aggressive monetary easing policy, the BoJ has appointed returning top official Masayoshi Amamiya, who holds similar ideals, to the Monetary Affairs Department. With Amamiya reappointed, it is apparent the BoJ is prepared for the aggressive shift towards easing. The yen currently trades in the 94-95 ranges.
Commodity currencies –The Australian and New Zealand dollars gave back some of last week's sharp gains as markets remained wary about developments in Cyprus that had renewed worries about the Eurozone debt problems. The RBA has held rates steady today, amid evidence that asset prices, consumer sentiment and housing construction were all starting to pick up. Data this month on employment figures for February and retail sales for January, has added to the case that the economy is gaining some momentum, and investors have recalled expectations for another rate cut. The Canadian dollar weakened against the USD, under pressure from weak domestic factory data. Canadian manufacturing sales unexpectedly fell 0.2% in January, missing the market forecast for a 0.9% rebound after the 3.3% tumble in December - its worst performance since the 2008-09 recession. Sales in the petroleum and coal product sector decreased 1.8%, and overall volume decreased 0.4% in January from December.
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