A circus of event risks with the Cyprus stand-off dominating, while we have major distractions in the form of the UK budget and the potential US FOMC game changer meeting later today.
Cyprus – now it’s a standoff
The Cyprus situation will not find an immediate resolution; stakes are rather high, to say the least, and completely out of proportion with the size of the Cyprus banking system. It is clear that Germany and the EU will not give in on basic bailout conditions. The island's finance minister is in Moscow, perhaps seeing if Russia can be convinced to participate in some way, as over $50 billion in Russian money is deposited in Cyprus banks.
We should all perk up our ears when we hear the likes of PIMCO yesterday saying that it will reduce its exposure to euro assets. The precedence that EU officials claim they are not setting with this situation, but actually are, risks triggering tremendous institutional flows. The major issue is one of trust – after all Juncker himself said that when things get tough, you lie.
Osborne budget – watch for language on BoE
The first major order of business this morning is the UK budget. The boring part applies to various marginal spending shifts, such as £2.5 billion of cuts in spending on some budget areas to pour into infrastructure projects. For example, we can expect more or less zero in the stimulus department as Osborne tries to stay on track to reduce the budget deficit. The degree of austerity could correlate with the degree of GBP weakness on that account (the idea being the BoE prints more money to compensate), but the more interesting part of today’s budget is whether Osborne moves forward with changes to the Bank of England’s remit in terms of its 2% inflation target. This could possibly give it some kind of dual mandate akin to the Fed’s – even if nothing concrete is announced, a strong suggestion that a remit change is under strong consideration does the same trick. That remit change is likely to be agreed ahead of Carney’s arrival this summer.
The setup would be very different for the EUR/GBP today were it not for the advent of the Cyprus situation, which has seen the steep correction of the pair. In fact, the reaction pattern for GBP today will be very tricky with Cyprus dominating the Euro question, and the FOMC dominating the USD side of things for the GBP/USD. We may have to wait until the end of the week before we know where we stand. The more interesting trade is figuring out where to short the GBP/USD pair, as the EUR/GBP could get caught in an expanding range to the downside as long as uncertainty reigns.
Note that the BoE meeting minutes of the previous meeting are also set for release this morning.
FOMC
Hopefully I covered the relevant aspects of today’s FOMC meeting in yesterday’s preview. The main focus is on whether there is any mention of fear of effect on credit markets from the existing Fed policy. The usual inspection of the degree to which the language on the economy will be secondary to this, and whether we get another dissenting voice or two in addition to Esther George’s dramatic dissension. The most dramatic dissension would be from Stein, who is on the Board of Governors and has been more prominent in discussing the risks of distortions in credit markets from Fed policy. It’s hard to believe that Stein would dissent. If he really has a point to make, it is more likely that he will insist on a key phrase or two in the monetary policy statement that sends a key message in exchange for his vote.
NZ current account data
A small side note to all of the big action everywhere else. New Zealand posted an ugly current account deficit number for Q4 and milk prices are rising to a record due to severe drought in New Zealand, making NZD look a bit shakier in the crosses. Finance Minister English was out talking down the currency a bit. New Zealand GDP figures will be issued later today.
Chart: NZD/USD
The NZD looks weak against the US dollar, as there was hardly any consolidation. The range is still holding for now, but post FOMC, a break of the 200-day moving average, and especially the 0.8160 support would be interesting for a big follow-up move lower to perhaps 0.7800 to begin with. 
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Economic Data Highlights
- New Zealand Q4 Current Account out at -5.0% of GDP vs. -4.9% expected and -4.7% in Q3
- Germany Feb. Producer Prices out at -0.1% MoM and +1.2% YoY vs. +0.2%/+1.5% expected, respectively and vs. +1.7% YoY in January.
- Sweden Riksbank governor Ingves to Speak (0845)
- Euro Zone January Current Account (0900)
- UK BoE Monetary Policy Meeting Minutes (0930)
- UK February Jobless Claims Change (0930)
- Switzerland March Credit Suisse ZEW Survey (1000)
- UK Chancellor Osborne to Present Budget (1230)
- Canada February Teranet/National Bank Home Price Index (1300)
- US DoE Crude Oil and Product Inventories (1430)
- Euro Zone March Consumer Confidence (1500)
- US FOMC Rate Decision/Monetary policy statement release (1800)
- US Fed summary of Economic Projections (1800)
- US Fed’s Bernanke to hold press conference (1815)
- New Zealand Q4 GDP (2145)
- Japan February Trade Balance (2350)
- China Mar. Flash HSBC Manufacturing PMI (0145)