Euro Tensely Awaits Cyprus Vote

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Market Drivers March 19, 2013
No deal on Cyprus yet
ZEW beats slightly as current conditions 13.6 vs. 6
Europe -0.56% Nikkei 2.03%
Oil $93/bbl
Gold $1601/oz.

Europe and Asia:
AUD RBA Policy Meeting March Minutes -scope for more cuts
JPY BOJ Governor Shirakawa Steps Down
EUR German ZEW Survey 48.5
GBP CPI 2.8%
GBP PPI Output 3.2%

North America:
USD Housing Starts 6:30
USD Building Permits 6:30

The EUR/USD spent most of the overnight trade in a very tight range as markets kept a close eye on the developments in Cyprus, but better than expected ZEW sentiment numbers helped lift the pair to 1.2950 by mid-morning european dealing. The price action in the EUR/USD was highly contained as lawmakers in Cyprus tried to refine the EU rescue deal to make it more palatable to the general public.

The latest iteration called for a tax levy of 12.5% on deposits above 500K, 9.9% for those at 100-500K, 6.75% for those with deposits at 20-100K and more importantly no levy on those with deposits of 20K or less. The change in the proposal was driven by the global outcry of protest over the fact that small depositors who should have their savings guaranteed were forced to share the cost burden with large depositors.

Although in reality the 6.5% tax was a far better deal for most Cypriot depositors than the prospect of full blown banking collapse, the symbolism of confiscating savings created an uproar amongst many market participants and raised fears of possible bank runs across peripheral Europe as savers in Spain, Italy and Portugal may feel that their capital was not secure.

Still Cyprus will only remain on the radar until some sort deal is passed. Regardless of the fairness of the actions, the currency’s market only concern is that the current situation does not devolve into a contagion spreading counter-party risk to banking centers elsewhere in the Mediterranean. The Cypriot Parliament is set to vote today at 6PM CET, but if the vote is delayed or postponed the EUR/USD could come in for more selling pressure as the day proceeds with 1.2880 key support level to watch.

If on the other hand the vote passes and the crisis is averted the EUR/USD could see a relief rally towards the 1.3000-1.3050 level especially given the modestly positive ZEW data that showed current conditions improving to 13.6 from 6 the month prior.

In North America the calendar is relatively barren with only the housing data on the docket which may have some mild impact on USD/JPY. The pair traded to a high of 95.75 in Asian trade, but that rally has fizzled as the delay in Cyprus has raised risk aversion concerns. Although Cyprus is one of the smallest economies in the EZ, for the second day in a row it remain the biggest story in the FX market and until its resolved price action is likely to be contained.

Boris Schlossberg
Managing Director

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