The dollar regained some ground...
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In This Issue.

* Cyprus was the market mover

* Regional manufacturing on the rise

* Euro takes a shot

* Singapore inflation

And, Now, Today's Pfennig For Your Thoughts!

The dollar regained some ground...

Good day...and welcome to Tuesday morning. We spent most of the day here in the Midwest digging ourselves from the weekend's blanket of snow. We officially saw just over a foot of snow, which is a ton for the St. Louis area, but the overall conditions could be been a lot worse. The road crews were prepared and the temps were very cooperative, so all in all, it was more of an inconvenience than a catastrophe. I think we can draw the same comparison to the agreement with Cyprus.

As I had mentioned yesterday, the small island nation did manage to qualify for its bailout package, but not without certain conditions. Uninsured depositors and senior bondholders could/would face losses with the new banking structure. The initial market response was a lot more tame than I would have guessed as the euro was actually sitting on a small gain early yesterday morning. Market sentiment turned on a dime mid-morning and sent the euro down well over a full cent in a matter of minutes. I was looking at the bailout terms and didn't see any changes that would cause such a stir, but it didn't take long for the culprit to float toward the surface.

It looks as though comments from Cypriot and European officials were enough to turn the tide. The remark that really threw the markets for a loop initially had suggested the Cyprus bank restructuring plan should be seen as a template for the rest of the eurozone and solving future banking problems. The official went on the say that imposing losses on depositors and bondholders must be a part of the bailout toolkit. The markets interpreted this as becoming the way all future dealings would be handled, so angst began to build rapidly. He later offered some clarification by saying Cyprus is a specific case with exceptional challenges and that adjustment programs are tailor made. In other words, he retracted his use of the word template.

Unfortunately, the damage was already done at that point, so his clarifying remarks went in one ear and out the other. We also had another official say that leaving the euro must be considered, but the Cypriot president offered reassurances that the nation will remain in the euro. In any instance, the ECB is needed to keep the system liquid for those banks who have remained solvent. As of this morning, banks in Cyprus have not re-opened and there is no time table as to when that might take place. Analysts are already calling for GDP numbers to take a significant hit this year and into next year as a result of the bailout terms.

Moody's was also critical of the decision as they said the policy makers' recent decisions will raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs, and broader financial market dislocation throughout the euro area in the future. I'm sure the Russians weren't too pleased with the outcome either. Remember, they have an estimated $31 billion on deposit in Cypriot banks so losses on uninsured amounts will probably come to a significant figure. I don't see much changing the euro selling bias in the near term unless we see the ECB come out and make serious references to the do anything it takes mantra.

In the end, these are all knee jerk reactions and time will go a long way in the healing process. The fact that an endorsement of losses was made regarding the measures marks a change, but tough times will facilitate tough decisions. But this action is the first time that senior bondholders in a euro region bank will take losses, which will happen with the wind down of Cyprus Popular Bank. The fragile state of confidence took a major blow and its going to be interesting to see how the ECB will react.

I think I've given more than enough attention to the whole Cyprus scenario, but that was pretty much all there was to talk about. We didn't have any significant data reports to speak of globally, so investors didn't have anything else to occupy their time. Here in the US, we only had the Chicago and Dallas area manufacturing reports to study yesterday. Both reports showed improvements from their last readings, but the Dallas region showed quite a pickup in March as it rose to 7.4 from 2.2. A rise in shipments and new orders were the biggest contributors to the rise.

Texas manufacturers now have a more positive outlook than in recent months, but they have still expressed continued concerns about the remaining question marks surrounding policy, such as the sequester, as well as the state of the overall economy. According to the Chicago Fed, economic activity picked up in February and the current indications would point toward that trend continuing into March. As we look at what's on tap for today, we'll get some substantial reports to review. Right out of the gate this morning, it's the February durable goods number.

The headline number is expected to have a much better showing than the January result. The experts are calling for an increase of 3.9%, but it will be interesting to see what kind of impact the sequester is going to have on durable goods since government spending is one of the components. This report is very volatile to begin with, but I'm sure more emphasis is going to be placed on the ex aircraft and non-defense figure. I generally like to look at the components of durable goods, so that works for me. We also get a January housing price index that is expected to yield another modest gain.

March consumer confidence is set for release right around the mid morning break time and is expected to show a fairly sizable fall. Since housing has dominated the economic data headlines, all eyes will be focused on the February new home sales number. Lastly, we get another regional manufacturing report, only this time in the Richmond area. So, there's going to be plenty of data to sift through today.

I feel like I've already covered the currency market by talking about Cyprus, but let's take a look anyway. As I said in the beginning, the dollar actually began the day in the red, but it didn't take long at all to turn in the other direction. I'm sure as you gathered, the euro was the worst performing currency as it fell just over 1% and dropped well into the 1.28 handle as the day progressed. Of the major currencies, the losses were mostly confined to the euro and the other European currencies. Except for the euro equivalents of the Danish krone and Swiss franc, the currencies of Norway and Sweden got sucked up into the selling pressures.

The sell Europe theme proved too great for both currencies to escape and was no fault of their own. We didn't see any major economic data that would have justified their nearly 0.50% fall, so traders just sold everything. A Swiss policy maker reiterated the fact that the SNB's currency cap vis a vis the euro is essential since there is no threat of inflation at all. I think they just wanted to throw that out there just in case traders were wondering given the events in Cyprus.

The Brazilian real finished in negative territory but only by a fraction of a percent. It also marked the third day that it traded weaker than 2 per dollar as speculation mounts that the central bank won't act to strengthen the currency since economic growth forecasts had been lowered. The government seems to be comfortable with inflation at the moment, so they don't have an incentive to encourage a stronger currency. It appears the Brazilian government is most comfortable with an exchange rate not too far away from 2 in either direction.

If we switch gears to those currencies with a gain yesterday, the Singapore dollar took the top prize. We usually don't see that too often but its 0.35% gain was the most in over two weeks as February inflation rose more than forecast to an eight month high of 4.9%. Singapore uses its exchange rate instead of interest rates to deal with inflation and monetary policy, so higher inflation would point toward the government being comfortable with more currency appreciation.

The Japanese yen ended the day in positive territory as fallout from safe haven buying pushed it up nearly 0.25%. The Australian dollar and Canadian dollar both finished with marginal gains, so it wasn't a total rout in the currency market. We also saw the Mexican peso hit an 18 month high as January economic growth surprised on the upside. The positive report was enough to stave off selling pressures from risk aversion resulting from the Cyprus deal.

The precious metals saw volatility for yet another day as silver actually finished the day higher while gold closed above $1,600 but with a $3 loss on the day. As it stands currently, gold is clinging to a slight gain for March and if that holds, it would be the first monthly gain since September. These numbers can change in a heartbeat, but investors have increased their bullish bets by 63% to 70,193 net long contracts, which is the biggest jump since September 2008. Hopefully this marks a change of fate for gold.

As I came in this morning, the bleeding has stopped for the euro as its up slightly this morning after an ECB member said they will do everything it can within the terms of its mandate to preserve the euro. It didn't take long for that card to be placed on the table, but it did the job in terms of calming some fears. We also saw another member say the reorganization for the Cyprus banking system will not serve as a model for other countries in the euro area. A day later and after some of the dust settled, the dollar is marginally weaker this morning, but focus has now shifted toward the US economic data this morning.

Then there was this.I saw an interview by Reuters with Olivier Blanchard, the International Monetary Fund's chief economist, who said that expanding the authority of major central banks could make them too powerful. "If you think now of central banks as having this much larger set of responsibilities and this much larger set of tools, then the issue of central bank independence becomes much more difficult," Blanchard said. "Do you actually want to give an independent central bank the right to choose loan-to-value ratios without any supervision from the political process? Isn't this going to lead to a democratic deficit in a way where a central bank becomes too powerful?"

To recap.News about the Cyprus bailout agreement dominated all of the financial markets. What began as a muted reaction soon turned in the wrong direction as the euro dropped over 1% and was trading well into the 1.28 handle. Certain account holders and senior bondholders will be faced with losses, which is a departure from how previous bailouts were handled, so investors speculate as to whether this will become the new protocol. Their regional manufacturing reports showed more progress and we'll see a fair amount of data today. The Singapore dollar was the best performing currency as inflation increased more than expected.

Currencies today 3/26/13. American Style: A$ $1.0475, kiwi .8353, C$ $.9801, euro 1.2874, sterling 1.5181, Swiss $1.0545. European Style: rand 9.2489, krone 5.8205, SEK 6.4971, forint 236.62, zloty 3.2411, koruna 20.0153, RUB 30.8633, yen 94.30, sing 1.2411, HKD 7.7595, INR 54.3750, China 6.2715, pesos 12.3336, BRL 2.0128, Dollar Index 82.84, Oil $95.30, 10-year 1.93%, Silver $28.80, Gold $1,598.75, and Platinum $1,570.25.

That's it for today.It turned out to be a very busy day on the trade desk yesterday, so I still have a few things that carried over to finish up before I focus on stuff for today. The local news was making light of the fact that we're going to have a white Easter since we'll still have some snow on the ground this weekend. I guess it makes it a little easier to spot those colorful eggs but it might also raise some questions about the bunny's footprints in the snow. For me, it doesn't get any better than Reese's peanut butter eggs. I can eat them by the handful, so it takes a good deal of will power on my part. On that note, that's it for today. Until tomorrow, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 03-26-2013 12:36 PM by Chuck Butler