• USD weakened further as QE is expected to begin tapering off

  • JPY strengthened against the USD as economists forecast better manufacturers’ sentiment

  • Commodity currencies strengthened after better than expected GDP data from NZD

USD - The US dollar slid further against most major currencies, but largely remained within ranges, as the dollar index fell by 0.4% since yesterday’s close. Although the US growth outlook is improving, the labor market remains weak. At the latest FOMC meeting this week, Fed Chair Bernanke struck a dovish tone with regards to QE, as the FOMC is likely to begin tapering the program. According to the new economic projections there is likely no change to the expected timing of interest rate hikes which has been pegged to employment figures. Hence, labor market indicators will be an important gauge for the timing and degree of tapering QE as well as any hike in rates.

EUR - The euro strengthened across the board on optimism Cyprus will be able to gather together a last-minute deal that will avert a financial meltdown before a Monday deadline. The EU has given Cyprus until Monday to raise the 5.8bn euros it needs to secure a 10bn euro international lifeline. Without a deal, the European Central Bank will cut funds to Cypriot banks. However, Cyprus moved a step closer to raising those funds by agreeing to spin off Greek units of debt-ridden Cypriot banks. The Cypriot presidency said the deal had been settled with favorable terms for Cyprus. German business confidence unexpectedly fell from a 10-month high in March.  The Ifo institute said its business climate index, declined to 106.7 from 107.4 in February.  That’s the first drop in five months.  However, the euro rose from a near four-month low against the dollar amid speculation Cyprus is moving closer to a deal to stave off financial collapse and prevent contagion from infecting the rest of the region.  The euro climbed 0.6% to EUR/USD $1.2980, from yesterday’s close.

GBP - Sterling reached a three-week high vs. the dollar, supported by an improvement in British economic data and on safe-haven flows due to lingering concerns about a financial collapse in Cyprus. The pound was also lifted by figures showing a lower UK public deficit and a rise in retail sales yesterday, which prompted investors who had been betting against sterling in recent weeks to cut their short positions. The government's preferred measure of Britain's public borrowing, which strips out some of the effects of its bank bailouts, showed a deficit of just 2.8bn pounds ($4.2bn) in February. This is the lowest deficit for February in the last five years and is far below the average market forecasts of an 8.45bn pound deficit. The slightly more optimistic outlook for the economy saw sterling climb 0.7% to GBP/USD 1.5216, from the start of this week.

JPY – The Japanese yen strengthened against the dollar as the BoJ’s tankan survey is expected to show manufacturers' sentiment improve in the first quarter. The March tankan's headline sentiment index for big manufacturers is expected to be minus 7, the poll of 19 economists showed, up from minus 12 in the December survey. If that were the case, it would be the first improvement in three quarters. The tankan report is a key touchstone for BOJ policymakers, which will be released on April 1, a few days before the BOJ's next policy meeting on April 3-4. The yen rose 0.1% to USD/JPY 94.73, from yesterday’s close.

Commodity Currencies - The Canadian dollar strengthened against its US counterpart after news that Cyprus' search for a bailout showed some promise. However, the CAD slipped by 0.1%, to USD/CAD 1.0232 for the week against the greenback which has benefitted from safe haven flows. The Australian and New Zealand dollars held firm against the US dollar on recent upbeat data. New Zealand's economy grew at its fastest pace in three years in the December quarter, as GDP rose a seasonally adjusted 1.5%, the largest gain since the December quarter in 2009. The outcome was almost double the 0.8% forecast of the RBNZ, however drought concerns in the area and the global growth outlook have prompted financial markets to trim expectations on the speed and extent of rate increases. The AUD climbed 0.4% and NZD rose to 0.9% from the start of the week.

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