Euro Ignores Drop in Ifo Hopes for Cyprus Resolution

Market Drivers March 22, 2013

IFO misses but market doesn't move as all eyes on Cyprus USD/JPY selling accelerates on profit taking, nothing new from Kuroda Europe -0.56% Nikkei -2.35% Oil $92.51/bbl Gold $1612/oz.

Europe and Asia:

AUD Conference Board Leading Index 0.2% vs. -0.1% EUR German IFO - Business Climate 106.7 EUR German IFO - Current Assessment 109.9 EUR German IFO - Expectations 103.6

North America:

None

The IFO report missed its mark declining for the first time in 5 months, but the news had little impact on the EUR/USD which remained above the 1.2900 level in morning European dealing as all eyes remained on Cyprus. The situation in Cyprus remained unresolved as the Finance Minister failed to get an extension of the loan from Russia while the Parliament continued to debate an alternative plan that involved the possibility of monetizing some of the country's gas reserves via a bond offering.

With no concrete plans on the table pressure continued to mount on Cyprus and Angela Merkel added to it, by stating flatly that the country's business model of attracting offshore deposits was dead irrespective of how the banking crisis is resolved. A spokesman for the Cypriot Parliament is expected to make an announcement this afternoon and the current hope in the market is that some sort of a solution may be reached before the week-end.

If Cypriot lawmakers are unable to reach some sort of a solution before the markets close, the downward pressure on EUR/USD may resume with traders fearful of holding positions over the weekend. For now the pair remains remarkably resilient on hopes that some sort of a solution will materialize.

Meanwhile as Cyprus continues to command attention, the news on the economic front shows further deterioration. The IFO sentiment survey dropped to 106.7 from 107.8 forecast, as fresh concerns about the EZ credit markets clearly weighed on business sentiment and demand began to taper off. This is the first drop in the IFO reading since September and may be an ominous sign that the economy in the EZ is beginning to worsen rather than improve as the quarter progresses.

This possibility is being ignored by the market right now, as Cyprus dominates all flow, but when traders attention turns back to fundamentals the prospect of negative growth in the EZ not only for this quarter, but perhaps Q2 as well, could start to sink in and that in turn could put fresh downward pressure on the unit after the Cyprus crisis is off the front page.