News about Cyprus is now drifting from the front pages, but downside pressure on the euro remains firmly in place on account of lackluster economic data and longer-term risk factors for the Eurozone economy.
After yesterday's tumultuous price action, the currency markets were decidedly more quiet in early-European trade today. EURUSD stabilized at the 1.2850 level as the Cyprus crisis started to fall off the front pages. In Cyprus, banks were likely to remain closed until Thursday while estimates from the finance minister suggested that uninsured depositors faced haircuts of up to 40%.
Still, despite the brutal cost of the final settlement and the still-unknown ramifications of the deal, the markets were considerably calmer today as traders felt that the Eurozone weathered yet another financial crisis.
Spokesmen for Eurogroup President Joeren Dijsselbloem continued to backtrack from his earlier statement that depositor funds could now become part of any future Eurozone bank restructuring, a comment that only exacerbated risk-aversion flows as investors feared for the safety of bank funds across periphery economies.
The calm today, however, could simply be the pause that refreshes. As we noted yesterday, downside pressures on the EURUSD remain, and they have much more to do with the lackluster rate of economic activity in the region, not the latest saga on the sovereign debt front.
See related: Euro Crisis Averted, but New Problems Await
So far, there has been no evidence of any uptick in overall demand, and the longer this trend continues, the greater the pressure on the European Central Bank (ECB) to ease further. The economic calendar this week is relatively barren, but the retail sales data from Germany along with the employment figures due on Thursday could set up another downside move in the EURUSD pair if they miss market expectations.
Commodity Currencies That Really Rock
Meanwhile, commodity dollars have been the star performers this week. Both the Australian (AUD) and New Zealand (NZD) dollars are holding their own against the dollar. In New Zealand, much-better-than-expected trade balance numbers helped the kiwi to remain bid near the 8350 level as the country posted a surplus of 414 million versus only two million expected.
The Aussie has also been very firm, holding above the 1.0450 level. If risk appetite revives in the North American session, the pairs could make a run towards the 1.0500 and 8400 levels, respectively.
New US Economic Data in Focus
In North America, the economic calendar carries durable goods, consumer confidence, and housing data. New home sales are expected to decline slightly to 426K from 437K the month prior, but if the data surprises to the upside, it will be yet another sign of underlying strength in the US housing sector and give a further boost to prospects for US economic growth.
After yesterday's massive volatility, today's price action is likely to remain more subdued with some short covering possibly pushing the EURUSD towards the 1.2900 figure as tensions from Cyprus begin to disappear. Overall, however, longer-term concerns for the euro continue to fester, and the pair remains vulnerable to further downside pressure as the week progresses.
By Boris Schlossberg of BK Asset Management