Data Indicates Deepening Contraction In The Eurozone Economy

We'd like to point out that despite the turmoil in Cyprus and weak economic data, the euro selloff was rather limited. There were some strength for recovery towards the end of the week as EUR/USD closed at 1.2983, not far from 1.3 psychological level. Cyprus' situation seemed to have some breakthrough after the ECB set March 25 deadline for ELA support. Positive news from Cyprus could have the euro pick up some strength for rebound initially this week. We'd be cautious, however, as some near term resistance levels in euro pairs need to be violated to confirm underlying strength for rebound.

Technically, we'll monitor these levels in euro pairs, including: 1.3106 in EUR/USD, 126.03 in EUR/JPY, 0.8601 in EUR/GBP and 1.2622 in EUR/AUD. We'd prefer to see at least two of these levels broken before confirming the strength and go long in euro. Meanwhile, note that GBP/USD should have formed a short term bottom at 1.4830, and strong rebound is anticipated in near term. The AUD/USD pair carried on the near term strength as expected. The yen would possibly engage in more consolidative trading. In case of Euro rebound, we'd prefer to go long in EUR/USD.

To recap: we'd firstl maintain long position in AUD/USD for 1.06. Secondly, we'd wait for some more indication to long EUR/USD.

The latest news regarding Cyprus is that the parliament approved three of eight measures on late Friday to secure the international bailout. A solidarity fund will be set up through nationalization of pensions. Capital controls will protect the banking system when banks are due to re-open on Tuesday. A Restructure plan will separate "bad" debts in troubled banks. However, the parliament still needs to vote on the plan to raise EUR 5.8b. Latest report showed that the likely scenario would be 20-25% tax on deposits of more than EUR 100k at the country's biggest lender, the Bank of Cyprus. President Anastasiades flew to Brussels on Saturday for talks with EU leaders.

Eurozone PMI data were generally disappointing. The eurozone PMI manufacturing unexpectedly dropped to 46.7 in March, while PMI services dropped to 46.5. The data indicated deepening contraction in the Eurozone economy. Markit noted that the PMI suggests that the economy would contract -0.3% in Q1 of 2013. German's manufacturing PMI unexpectedly showed contraction by dipping to 48.9, while services PMI also dropped sharply to 51.6. Situation in France was worse with manufacturing PMI unchanged at at 43.9 while services PMI dropped to 41.9. Markit also noted that "digging into the data shows increasing schisms within the eurozone. National divergences between France and Germany have widened so far this year to the worst seen since the survey began in 1998. Germany is on course to grow in the first quarter. In contrast, France's downturn is likely to deepen, bringing the euro area's second-largest member more in line with the periphery than with the now solitary-looking German 'core'."

As expected, Fed officials left the policy rate unchanged and the asset purchases at US$ 85B. Policymakers acknowledged improvements in economic developments since the January meeting, but indicated the still-high unemployment rate would be a hindrance for the Fed to achieve its dual mandate. Staff projections were downgraded modestly to reflect restrictive fiscal policy and downside growth risks.

BoE minutes revealed that the MPC voted 6-3 to keep the asset purchase program size unchanged at GBP 375b. Governor King, MPC members Miles and Fisher voted for a GBP 25b expansion. It was voted down as a majority of the members saw that additional stimulus "could lead to inflation expectations drifting upwards" and "unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term."

The RBA minutes for the March meeting were delivered in a dovish tone. Together with the comments from RBA Deputy Governor Philip Lowe a few hours before the minutes were released, the Australian dollar dropped against the U.S. dollar in anticipation of further rate cut from the central bank. In March, policymakers decided to leave the cash rate unchanged at 3%.