USD – The US dollar is stronger against most major currencies as market fears rise over future impacts of a Cyprus bailout and bank levy. Domestically, US homebuilder sentiment slipped in March, falling to the lowest level in five months as supply chain concerns and rising costs dented enthusiasm. The NAHB Housing Market index fell to 44 from 46 in February, missing expectations for a gain to 47. It was the lowest level since October 2012. Homebuilder sentiment climbed strongly through the second half of 2012 as the housing sector improved, though the index has now pulled back for two months in a row. Even with March's decline, it is 16 points higher than it was a year ago. Still, it remains below the 50 level which indicates more builders view market conditions as poor vs. favorable. The index has not been above 50 since April 2006. This week, investors are looking to data releases from US chain store sales, building permits, housing starts and the Redbook Index of large US merchandise retailers. Generally, the market is broadly risk-off and global investors are fleeing to the safe-haven dollar as fresh fears over a Eurozone crisis takes center stage.

EUR - The euro slid to 3-month lows vs. the dollar after the Eurozone announced a bailout of troubled member country, Cyprus, which included harsh terms for the nation’s depositors. The single currency tumbled to lows at $1.2880 overnight following the announcement of a EUR 10 billion aid package for Cyprus that also called for a tax on deposits between 6.75% – 9.9% to help fund the bailout. The move to levy a tax on deposits is the first of its kind for Eurozone assistance. The move was opposed by the ECB and sparked fears of a potential contagion in the euro as both depositors and investors rush to pull money out of troubled European banks. Global equity markets turned lower on the news as German bonds rallied and Italian bonds plunged amid heightened risk aversion. Cypriot ministers were working to revise the plan amid rising public anger that prompted many to withdraw deposits before a vote to approve the assistance package tomorrow. Amid escalating tensions over the plan, Russia which has a large number of citizens with deposits in Cyprus, criticized the plan with Prime Minister Putin weighing in that the plan was unfair and set a dangerous precedent. Also adding to worries in Europe; S&P warned of a high risk that Spain, Italy, Portugal and France may not be able to implement necessary reforms due to rising unemployment and growing public opposition to austerity measures that were becoming “socially explosive.”

GBP – The pound had a volatile week last week, hitting a two and a half year low of 1.4850 on Tuesday before rising 2.2% to 1.5150 on Friday. This move higher was in response to Bank of England Governor Mervyn King’s comments that he was not intentionally trying to weaken the pound. He is, however, pushing for more stimulus to support Britain’s struggling economy without stoking investor inflation expectations, which are already at their highest levels in 4 ½ years. This is a tricky juggling act as the BoE is trying to bolster an economy at risk of falling into recession for the third time in five years amid inflation that has stayed above the 2% target for 38 straight months. Inflation is expected to stay above 2% until early 2016, with tomorrow’s reading expected to come in at 2.8%.

JPY – The Japanese yen strengthened after the proposed unprecedented levy on bank deposits in Cyprus threatened to plunge Europe back into crisis. A Cypriot induced spike in risk aversion has been the main factor driving JPY. Tomorrow, the new board will take over leadership at the BoJ, which will introduce increasing speculation as to what decisions it is likely to take at their first April 3/4th meeting. We expect relatively aggressive monetary policy and accordingly expect to see JPY move back towards its highs later this month or in early April.

Commodity currencies – The CAD weakened against the USD as the spread between Brent crude and Western Canadian Select, a proxy for the prices at which Canada imports and exports oil, has dropped below the 2012 average to 34.80 from 39.90. With Canada’s strong AAA rating and the improving dynamics in oil prices, market participants believe the CAD should see support below current levels. Canadian manufacturing and retail sales data are due tomorrow and Thursday, respectively. The NZD weakened against the dollar even though consumer confidence held close to its highest level in a year. The Westpac-McDermott Miller consumer confidence index eased marginally to 110.8 from 111.1 in the previous quarter. Likewise, NZD government bonds shot up, shooting yields as much as 17 basis points lower along the curve. Economists say the kiwi is expected to further weaken and may drop to the $0.8160-$0.8200 range.

RMB - The Chinese yuan declined after the central bank fixed a slightly weaker midpoint of 6.2741, while the spot yuan closed at 6.2158 per dollar, down 0.04% from Friday's close while the offshore spot yuan came in at 6.2080. In other news, Governor Zhou Xiaochuan has been reappointed as the governor of the PBOC. This news should lend stability to the central bank leadership and further assist with the internationalization of the currency. PBOC Deputy Governor Yi Gang also reaffirmed that "We are making tremendous progress in the capital account convertibility.” With little data due out of China this week, look for the yuan to hold close to current levels as the PBOC monitors the further weakening of Asian currencies.

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