The Week Began With A Bang And Ending With A Whimper

The US dollar remains in relatively narrow ranges against most of the major currencies, inside yesterday's ranges. The notable exception is the Japanese yen, where a short covering squeeze that began yesterday continues.

The greenback is above the extreme low set in early Asia on Monday near JPY93.60, it appears poised for a retest. As a mile marker of sorts, the 20-day moving average comes in just below JPY94.50 today and the greenback has not closed below it since the end of February. As one would expect with the continued recovery in the yen, Japanese shares were hit hard, with the Nikkei fell 2.35%, giving back this week's entire gains plus a little more.

The real focus, however, remains in Europe. After several days of meeting with Russian officials, Cypriots have come back empty handed. The Germans have made it clear that Cypriot proposals for a solidarity fund that raids pensions is not acceptable. This after they had backed the Cypriot President's proposal last weekend to tax small depositors.

The negotiating style, if one wants to call it that, is not helpful. Not attending meetings and more broadly, not talking to the Troika, has irked Cypriot neighbors. The restructuring of the countries' two largest banks appears to be a step in the right direction, but it does not appear sufficient in itself. The meaning and significance of the S&P downgrade of Cyprus' credit to CCC from CCC+ with a negative outlook escapes us.

Although the Cyprus situation is not resolved and is more protracted than we had anticipated last weekend, one must be impressed with how well the markets have absorbed it, which is taking place while political uncertainty continues to hang over Italy, the third largest economy in the euro area. The euro is off 1.1% on the week, though central European currencies--Poland, Czech and Hungary had the weakest currencies, all of which lost round 1% against the euro.

Among the majors, the Swedish krona and Norwegian krone, with what are understood to be relatively strong banking systems. The strongest currency this week has been the Japanese yen, which has appreciated by almost 1% against the greenback. Separately, we note that sterling has also performed well this week, gaining a little more than 0.5%.

Peripheral European bond markets are narrowly mixed today. On the week, Italy's 10-year benchmark yield was off 6 bp and Spain's was off 10 bp. Greek bonds were the big loser on the week with the 10-year up 75 bp. In the core, notably Dutch bonds fared the worst, rising 12 bp.

Equity markets have been heavy. Spain and Sweden have been the worst performing with 3.5% and 2.9% decline respectively, through midday in London. Of note the Italian stock market fared among the best, losing about 0.3%. Given the relative strength of the yen, the Nikkei was also fairly resilient, despite today's loss. Over the week, it is off 0.33%.

The news stream is light ahead of the weekend. The German IFO was softer than expected, but was quickly shrugged off by market, which is understandably more interested in the reports from Cyprus. French business confidence was also poor, but hardly elicited a reaction. Given yesterday's flash PMI, poor French data is not unexpected.

Lastly, we note that, perhaps lost in the Cyprus focus yesterday, the US House of Representatives passed the Continuing Resolution bill, which the Senate approved Wed that 1) averts a closure of the federal government, 2) dilutes some of the impact of the sequester by increasing baseline funding for some programs. This will act as a bit of a cushion for when the automatic cuts in spending begin taking effect over the course of the year.