Cyprus vote awaited

The big market mover overnight was the VIX ‘fear gauge’ spiking in the wake of increased risk aversion. Follow through looks limited, however. Markets look a bit calmer as the panic following the news of levy of bank deposits in Cyprus as part of a EUR 10 billion bailout for the country, eased. No sign of bank runs elsewhere in the Eurozone and the go ahead to make the deposit levy more progressive (ie a higher levy on bigger deposit holders) while maintaining the total amount at around EUR 5.8 billion, have helped to calm tensions.

Nonetheless, today’s delayed vote in Cyprus’ parliament to approve the levy could provoke more nervousness especially as the outcome is too close to call. Attention will therefore remain firmly fixed on developments in Cyprus, with economic data taking a back seat. The highlights on the data front include likely gains in the German March ZEW investor confidence survey and US February housing starts and building permits.

Currency movements look to be limited ahead of the Cyprus vote and then the Fed FOMC outcome tomorrow. The EUR remains the weakest link, with gains in the currency likely to be sold into although support around EUR/USD 1.2876 is likely to hold unless the Cyprus vote fails to endorse the deposit levy. If this is the case, expect further sharp pressure on the EUR and a much bigger drop in the currency and risk currencies in general. European and Cyprus officials would have to back to the table but in the meantime panic would ensue.

The RBA minutes released this morning maintained that the door remains open for further policy rate cuts although they did note that the economy is responding to previous cuts with the impact having further to run. There is little in the minutes to suggest further easing is imminent. The RBA minutes are unlikely to dent the AUD which remains resilient having managed to remain well supported even despite the Cyprus panic. AUD/USD is likely to consolidate around current levels just below 1.0400 before embarking on further gains over coming weeks.

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