USD – The US dollar is higher against the EUR GBP and JPY but lower against the emerging and commodity currencies after a deal was struck between Cyprus and European leaders to support the Cypriot financial sector. Domestically, the Dallas Fed factory activity index reported its strongest reading in a year at 7.4 in March vs. a prior 6.2, indicating a slightly faster pace of output growth. The pickup in manufacturing activity, most notably new orders and shipments indexes, moved up strongly in March after dipping in February. The new orders index came in at 8.7, up from 2.8, and the shipments index rose 8 points to 10.6. In addition, the Chicago Fed’s national activity index rose in February to 0.44 vs. a prior ‐0.49. The underlying economic indicators to this index are drawn from five major categories of data: output and income; employment; personal consumption; housing starts; manufacturing; and inventories. The index reported a threemonth moving average of 0.09, which was above its historical trend, suggesting limited inflationary pressure for this coming year, the Chicago Fed said. The Chicago Fed’s Midwest manufacturing index comprising of Illinois, Indiana, Iowa, Michigan and Wisconsin also edged up in January with a reading of 97.0, vs. a prior 94.7. Today’s positive data in manufacturing activity suggests a slight growth in the current state of economic activity with manageable inflationary pressures, supporting stability in the dollar and encouraging bets on commodity and emerging market currencies.

EUR – The euro turned lower vs. the dollar despite a last minute deal by Cyprus to secure euro zone assistance and avert a total collapse of its banking sector. The single currency staged a brief relief rally on the news before turning lower on concerns over the outlook for the euro zone. Under the plan, Cyprus agreed to use deposits over EUR 100,000 which are not guaranteed under EU law to help recapitalize its banking sector. The euro zone will contribute EUR 10 billion in assistance, averting a threat to withhold all assistance if a deal was not reached by today. The plan is expected to take a heavy toll on large depositors, many of whom are Russians and has prompted anger from the Russian government. The euros inability to sustain its gains from the relief rally highlights the larger concerns facing the region. The terms of Cyprus’s bailout which could assess losses of up to 30% on large depositors also drew investor concerns as a template for future bailouts going forward which could further shake confidence in Europe’s fragile banking sector. Amid this backdrop of uncertainty, the euro’s weak tone is likely to persist.

GBP – Sterling is slightly weaker against the US dollar as no revisions are expected in the final Q4 GDP release, from the previously estimated 0.3% contraction in the quarter. The CBI’s March distributive trades survey will also be of some interest after the strong February retail sales numbers Last week, UK CPI came out as expected at 2.8% which is still relatively high as the BoE has set a target inflation rate of 2.0%. Plans for the 2013 Budget were released on Wednesday, however on Friday, Fitch placed the UK’s rating on negative watch, raising the chance of a downgrade. Fitch had previously stated its criteria for a downgrade would be if gross debt to GDP failed to stabilize below 100%.

JPY – The yen weakened against USD this morning as the Japanese Prime Minister Abe described the yen weakening trend as an overall plus for the Japanese economy when speaking to parliament overnight. The BoJ confirmed overnight that Japanese household assets increased at their fastest pace in five years during Q4 2012 rising to JPY 1,547 trillion. This week’s inflation release, which is expected to show increasing deflationary pressures, will be important in the lead up to the April 3rd/4th BoJ meeting.

Commodity Currencies –The CAD outperformed all other major currencies against the USD as investors turned to riskier assets and crude prices jumped supported by the Cyprus resolution. Currently USD/CAD is trading at 1.0217 vs. last week’s close at 1.0233, as data released by the Commodity Futures Trading Commission showed traders increased their short positions in the CAD. The key data this week for the CAD will be the monthly GDP figures released on Thursday. The Australian and New Zealand dollars rallied as Cyprus agreed to the outlines of an international bailout, which spurred risk appetite in the market. Further, expectation that the Regional Bank of Australia will turn increasingly less dovish over the coming months added additional support to the currency which reached a 2‐ month high in the overnight session.

Renminbi – The Chinese yuan posted a record high after the central bank set an aggressive midpoint in response to the Cyprus banking crisis as the PBOC bets on a deal with the ECB. Domestically, China’s economy grew 7.9% in the final quarter of last year, well off the 10.4% mark seen from 2001 through 2011. Growth is anticipated to increase to 8.1% this quarter and then to 8.2% in the following two quarters. An initial report of a private Purchasing Managers’ Index issued on March 21 has the figure rising to 51.7 this month, signaling the expansion in Chinese manufacturing is gaining steam. The renminbi rose 0.02% in the previous week to close at 6.2122 and hit 6.2095 in today’s trading, the highest mark it has seen since 1993.

For more market reports go to Union Bank of California