Euro swept lower despite deal for Cyprus
Ahead of an 11th-hour deal which allowed Cyprus to avert a banking collapse did little to stop the euro from stumbling lower yet again. The single currency had initially risen on Monday after opening the week lower for the second consecutive week, but quickly fell across the board as it was hurt by mounting fears that future bailouts in the area could include the same conditions as those imposed on Cyprus.
Cyprus secured a financial bailout package worth €10 billion over the weekend following days of stern negotiations and a week of turmoil. The whole of last week was characterised by concern that Cyprus may be forced out of the common currency area as the Cypriot Government struggled to come up with a plan to raise €5.8 billion needed to secure financial aid. The Parliament had rejected the terms for the first agreed package.
Under the terms agreed with international lenders over the weekend, deposits of over €100,000 held in two of the island’s largest banks will be raided to cover debts of Popular Bank of Cyprus, also known as Laiki, and to recapitalise Bank of Cyprus. The news helped lift EUR/USD to 1.3048 on Monday, but soon forex investors started to focus on a potential shift in eurozone policy in regards to bailouts.
The single currency reversed its course after the head of the Eurogroup Jeroen Dijsselbloem said the financial aid plan for Cyprus will serve as a “template for dealing with future banking crises”. Although he later retracted saying that Cyprus was a specific case with exceptional challenges, investors interpreted the comments as an indication that future bailouts will need to include greater contributions from the private sector.
This sparked a sell-off in riskier assets and European equity markets reversed more than one per cent gains on the day to close in negative. US stock markets also closed in the red with the S&P 500 retracing after hitting a fresh all-time high. The euro lost ground against all of its major rivals and hit fresh lows against the dollar, yen and the pound. EUR/USD plummeted to a four-month low by 1.2829 and EUR/JPY hit a one-month trough at 120.10. The common currency was also hurt by speculation that Italy’s credit rating will be downgraded as it still struggles to form a new government after last month’s inconclusive election results.
The dollar index, on the other hand, edged closer to a seven-and-a-half month peak, as traders sought the greenback’s safety given the turmoil across the Atlantic.
The Japanese yen also rallied on Monday, as investors fled towards safe haven assets. The yen took a breather from its recent decline after newly appointed Bank of Japan Governor Haruhiko Kuroda provided no new information regarding future monetary policy at his first official news conference. The Nipponese currency has been sold aggressively in recent months on anticipation of more aggressive stimulus by the Central Bank to end decades of deflation. USD/JPY eased to 93.53 on Monday, some way off a three-and-a-half year high of 96.71 hit on March 12. Still, analysts expect to Kuroda to announce a new stimulus programme at his first scheduled policy meeting on April 3-4 which will likely send the pair back on its upward trend.
The British pound and Australian dollar managed to fend off the aggressive sell-off of riskier assets following Dijsselbloem’s comments. Forex investors dumped the euro but cable and the Aussie held firmly and only suffered minor losses. GBP/USD fell to 1.5143 at the start of the week after hitting a one-month peak by 1.5261 earlier in the session while the AUD/USD eased off to close at 1.0455 on Monday but resumed its recent uptrend to trade at 1.0486 on Tuesday. The Aussie has found support in recent weeks as the Reserve Bank of Australia has shifted to a wait and see stance in contrast to the Fed, ECB and other major central banks which are undertaking an easing approach.
Sterling neared a five-week peak against the single currency on Monday and edged further away from a 16-month low hit on February 25. EUR/GBP touched 0.8458 and looks to extend its decline as long as the cloud of doubt persists on the euro area economy.
Upcoming FX key events
Today: German unemployment change, US GDP and Canadian GDP.
Tomorrow: French PPI, US personal spending and US Michigan consumer sentiment.
Technical key points
EUR/USD is bearish target 1.2660, key reversal point 1.3300.
EUR/GBP is neutral.
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.
RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only. This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation. They are subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. No warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
Emman Xuereb is a trader at RTFX Ltd.