EUR – The Next Few Hours…

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In the words of the Cyprus government, “the next few hours will determine the fate” of the country and the currency that it shares with 16 other nations. The EUR/USD is trading extremely well this morning on the hopes that Parliament will approve their latest plan to avoid bankruptcy and immediate withdrawal of liquidity support from the European Central Bank. A vote is expected later this evening in Cyprus (afternoon in North America) but the deal is still evolving as we speak. With no help from the Russians, their latest plan involves restructuring Laiki Bank, the country’s second largest lender, nationalizing pension funds, conducting an emergency bond sale and taxing deposits over 100,000 euros (the word is a one time 15% tax on deposits over this amount). Originally, angry demonstrations in Cyprus led the President to take the deposit levy off the legislation but the Germans criticized the government for their dangerous plans to raid pension funds of state owned businesses. The first test is whether this deal passes Parliament. If it does, it still needs to have the full endorsement of the Troika. According to Bloomberg, Eurozone Finance Ministers want Cyprus to restructure its 2 largest banks, freeze uninsured deposits of funds over 100,000 euros and tax them at a rate that could be as high as 40%.

This is a continually evolving situation and for this reason we are surprised by the resilience of the EUR/USD because the stakes are high and the odds are stacked against Cyprus. Nonetheless Europe’s currency along with its stocks and bonds are taking the developments in stride and we can’t ignore that. Investors clearly feel that with the ECB holding their liquidity line hostage, Cyprus has no choice but to reach a deal by Tuesday. If they do, the EUR/USD will soar in relief and if they don’t it could drop to fresh year to date lows. The next few hours is critical because if Parliament rejects the legislation once again, the government will have to go back to square one and time is running out. Along these lines, we expect rallies in the EUR/USD and other major currencies to remain limited until there is a resolution.

With no U.S. economic data on the calendar this morning, the focus is exclusively on Europe. Fed President Raskin spoke this morning and her comment that the central bank plans to keep interest rates low for a considerable period of time is consistent with her generally dovish bias.

Kathy Lien
Managing Director

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