FX: What Happens if Cyprus Votes No To Levy

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The currency market is in wait and see mode right now with the EUR/USD trading quietly ahead of the Parliament of Cyprus’ debate and vote on the bank levy. This is expected to begin at 6pm local time, which is 4pm GMT or 12 noon ET. With the country’s Finance Minister headed for Russia and the country’s President in continuing talks with German Chancellor Merkel, we would not be surprised if the vote is delayed. The latest draft of the legislation exempts deposits under 20,000 euros but we are not sure how much that would help as deposits above 20k will be taxed anywhere between 6.75% and 12.5%.

Our opinion of the fairness of the levy aside, we don’t expect Parliament to approve the levy right away in the first round of voting because it would be political suicide. While saying no to the levy could mean economic suicide, rejecting it would give the Cyprus government justification to start discussions with the rest of the Eurozone on alternative ways to raise revenue. Therefore a no vote on the levy may not drive the EUR/USD immediately lower. The lack of further losses in the EUR/USD or substantial losses in European stocks today suggests that investors are handling the crisis well but we continue to be wary of how long this stability can last.

Meanwhile U.S. housing starts and building permits were released this morning and the data was mixed. Housing starts rose 0.8% in the month of February, an anemic rise after the 7.3% decline the previous month. Building permits rose 4.6%, up from a downwardly revised 0.6% decline in January. Taking the previous month’s revisions into consideration, the data wasn’t nearly as bad because starts and permits both increased but it wasn’t unambiguously impressive either which validates our belief that the U.S. recovery is losing momentum in the month of March. Today’s housing data follows last week’s plunge in consumer confidence and yesterday’s decline in builder confidence. This along with the uncertainty in Cyprus provides reason for caution for the Federal Reserve, who meets tomorrow.

Kathy Lien
Managing Director

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