Euro Gaps Down On Cyprus Crisis

The dollar rose on Monday after safety flows increased on Cyprus crisis fears. The proposed use of a tax or levy on bank deposits to pay for the bank bailout sent markets reeling more than anything. There were concerns such a solution could be used in larger peripheral bailouts and lead to a run on euro-zone banks as savers rushed to get their money out before taking a hit. The dollar went back into safe-haven mode after the news in former euro-zone crisis periods. On the data front it was a quiet day with no releases. Tuesday saw markets in consolidation mode as markets awaited key news on Wednesday and the results of the Cyprus parliament vote on whether or not impose bank levies. On the data front, Housing Starts (Feb) y/y rose by 0.8% -- but this was less then the expected 2.8%, although it was more than the -7.3% previously. Building Permits for the same period did better-than-expected, rising to 4.6% from -0.6% previously. The overall positive tenor of the housing figures helped support the dollar further as it continued to back the view that the housing sector in the U.S was recovering.

EUR
The euro fell on Monday morning, gaping down at the open, after the shocking news over the weekend that Cypriot banks would have to be bailed out. It was fear of a potential run on euro-zone banks, however, which really weakened the single currency after the Cypriot government announced it would be taxing bank deposits to pay for the bailout, and there was speculation that the same method might be used in other peripheral euro-zone countries. The euro recovered later, however, as the details of the bailout changed and Russia signalled it might come to the island's aid with a handout of 2.8bn of its own. There were also signs the amounts taxed might change from the across-the-board levy initially put forward to only taxing those with over 100,000 euros. The idea that the same deposit tax might be used in other countries seemed less likely. Cyprus is a special case due to the large amounts of Russian money deposited in its banks. Nevertheless markets remained shaken as a result of the suggestion of such a radical new policy.

GBP
The pound traded mixed-to-soft as euro-zone concerns affected sterling due to their close proximity. A general fall in risk appetite dragged, pulling it back down, after its perky bounce on Thursday. On the data front, Rightmove House Prices was overall positive and helped limit downside, showing a basis-point rise y/y in March, rising by 1.2% overall from 1.1% previously; m/m however, it increased by 1.7% - which showed an easing-off from the 2.8% previously. On Tuesday the pound traded in quite a tight range as traders stood aside before the two great news events of the week scheduled on Wednesday, which were the BOE minutes and the Chancellor's spring budget statement. Currently expectations are still more positive than a few weeks ago, with hopes of more growth-inducing policies and less austerity in the budget, and a less doveish BOE minutes. The pound could bounce if hopes come true as a more negative scenario is already priced in.

JPY
The yen rose on Monday as a result of an increase in safe-haven flows after markets went into risk averse mode following Cyprus crisis fears and the authority's intention to tax deposits to finance the bailout. The currency reverted to its old euro-crisis mode and pared recent losses in most pairs. Monday also saw the news of the reappointment of another BoJ official, Masayoshi Amamiya, who was the principle architect of the bank's previous quantitative easing campaigns, including the pumping of 10 trillion yen into the economy in February 2012, however, he was shifted to work in Osaka 6-months ago. His reappointment is a sign the new governor Kuroda is preparing for a QE push, although according to insider's he is a sensible practitioner who might bring a moderating influence to policy. On Monday Masaaki Shirakawa finally officially stepped down from being governor of the BoJ, admitting, as he left that he had failed to bring 'down' deflation during his tenure.