Ahead of week’s start news released over the weekend spooked investors worldwide. Last Saturday it was reported that Cyprus was requesting bank deposit holders to share in the burden of a proposed €10 billion bailout agreed with the EU and IMF. The funds were intended to be used to help the ailing Cypriot banking sector but the initial conditions announced were somewhat tough to digest.
A number of key challenges need to be factored in at this point in time
In the proposal announced over the weekend, bank deposit holders were being asked to pay a one-off levy; those deposit holders with amounts less that €100,000 would pay 6.75 per cent, while those holding deposits above this amount would be asked to pay 9.90 per cent. In exchange of the one-off levy paid, depositors would be compensated with an equivalent amount of shares in the bank.
Investors’ reaction was generally negative as it seemed that the EZ issues were back to populate their concerns. While Cyprus was the subject, the real issue behind this entire episode was that if Cyprus and the EU proceeded with such conditions they would risk creating a precedent – that would remain to haunt investors holding deposits in European financial institutions. All this comes at a moment were the EZ was actually starting to convince investors of its goodwill.
Risk-off moves started to reflect decipherable patterns on the foreign exchange markets. The euro was hit hard at Sunday’s open. The EUR/USD currency pair opened the current week at the price of 1.2913 after Friday’s close at 1.3075 – in the process creating what traders call a gap, 160 pips lower from the previous close. Even the EUR/CHF was strained lower towards 1.2169 throughout Monday’s session, after stopping just short of 1.24 levels earlier this month.
The EUR/USD slipped to lows of 1.2882 throughout Monday’s session but the currency pair showed some signs of consolidation early into the Tuesday session. What are the factors in play now behind the price action for EUR/USD?
The US dollar has been garnering support in the previous weeks, support which was in line with improving US economic data and expected policy reactions. In reality we have to see the outcome of this week’s Federal Open Market committee’s policy decision that was expected late Wednesday evening. The focus here will be with regards to hints or suggestions of when the Fed’s stimulus could be ended.
With regards to the euro; a number of key challenges need to be factored in at this point in time. The euro has seen support flow back to it after a key commitment made by ECB president Mario Draghi to do “whatever it takes” to save the euro back towards mid-2012. The EZ, now risks erasing the progress made since than if the Cyprus issues continue to escalate.
The euro continues to enjoy support as financial markets recover to normality but resurfacing challenges such as Cyprus or the Italian political gridlock will continue to weigh on its performance. In addition the central bank policy and the ECB’s ongoing pledge for liquidity or stimulus should also leave its toll on the single currency.
Up till Tuesday morning a Government spokesman released comments suggesting that a Cyprus Parliament will most likely not approve the levy (at least as proposed over the weekend) and it was expected that the Cyprus President would be engaging in further talks with the EZ and possibly also with the Russian President.
A vote originally scheduled to take place on Monday had been postponed to last Tuesday. In the meantime, Cyprus banks were expected to remain closed at least until Thursday. According to statistics by the Central Bank of Cyprus, bank deposits held by domestic residents actually account for less than half of Cyprus’ bank deposits.
Key price changes were not only restricted to the euro even the yellow metal saw some interesting price action. Gold opened this week’s session at $1,606.48 on the back of safe haven demand. Gold has been in a bearish phase since hitting highs of $1,795.99 back in October 2012 but downside has been limited to a key support around $1,550 region.
The renewed support for this metal is easily attributable to a general concern over safety of deposits, because if this continues to escalate gold would be a worthwhile alternative.
Upcoming FX key events
Today: UK retail sales and PSNB; Canadian retail sales and Philadelphia Fed Business Index.
Tomorrow: German IFO.
Technical key points
EUR/USD is neutral.
EUR/GBP is bullish target 0.90, key reversal point 0.8570.
USD/JPY is bullish, target 99.0, key reversal point 83.90.
GBP/USD is bearish target 1.45, key reversal point 1.5300.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral
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Rudolf Muscat is a senior trader at RTFX Ltd.