No Fed suprises, Cyprus unresolved, Kuroda weakens yen

The Fed delivered no surprises overnight, with policy settings and guidance left unchanged and only minor changes the statement. Slight downward revisions to near term growth and the unemployment rate reflected recent fiscal issues but the Fed sounded more upbeat on current economic conditions. The Fed statement helped markets retain a better mood despite the continued fluidity of the situation in Cyprus.

On this front, as Cyprus tries to renegotiate the terms of EUR 10 billion the country appears to be stuck between a rock and a hard place. Increasing the levy on higher value deposits as has been suggested threatens to infuriate Cyprus’ biggest creditor Russia but at the same time a lack of any forthcoming deal will put at jeopardy and liquidity support from the ECB to Cyprus’ banks. Markets appear to be giving the country and Eurozone officials some leeway leaving most asset markets in ranges.

Although the saga in Cyprus had helped to extend the EUR’s decline the truth is that the currency was already in decline from its 1 February high around 1.3712 in the wake of an increasingly adverse growth and yield gap with the US and Italian political uncertainty.

While market panic over Cyprus appears to have eased helping the EUR to find some stability the fact remains that no solution is on the table and once again it feels as though Eurozone officials are belatedly scrambling to find solutions before market patience runs out. EUR/USD looks supported however, around the 200 day moving average at 1.2878.

USD/JPY has been correlated most with the relative move in 10Y yield differentials between US Treasuries and Japanese JGBs. Given the prospects that the 10Y differential in terms of Treasuries versus JGBs will widen further it implies yet more gains in USD/JPY.

It is worth watching yields closely but at this point I await stronger signals that US bond yields are headed higher before contemplating a further JPY decline. In the near term USD/JPY looks supported around 94.72 as risk appetite returns and ahead of an inaugural speech by BoJ Governor Kuroda in which he is expected to announce a major policy shift aimed at bold easing according to Japanese press.


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