EUR/USD Stabilizes at 1.2900 As Investors Await Approval of Cyprus Deal

Posted on

Market Drivers For March 18, 2013
Cyprus bank deposit haircut sends markets into tailspin EURUSD gaps down by more than -100 points
Osborne sticks with UK austerity
Europe – 1.66% Nikkei -2.71%
Oil 92.39/bbl
Gold 1602/oz.

Europe and Asia:
CHF SECO March 2013 Economic Forecasts
GBP Rightmove House Prices 1.7% vs. 2.8%

North America:

It’s been a very volatile start of the week in FX with EUR/USD gapping lower by more than -100 points on the the news that EU approved a deal that would tax Cyprus bank deposits in return for the financial rescue of the sector. The pair tumbled to hit a low of 1.2881 in late Asian trade on fears of contagion to the rest of the EZ as investors grew increasingly concerned that such schemes could be employed against other periphery members.

The Cyprus banking rescue deal evoked howls of protest from the markets and analysts alike, not only because it confiscated part of the depositor funds but also because it levied the tax on small depositors under 100,000 EUR breaking the fundamental issue of trust in the financial sector. The outcry has been so loud that the Cypriot Parliament is now in the process of modifying the deal to make it more progressive by lowering the tax to 3.5% for those who hold deposits under 100,000 EUR and raising it to 15% for those with deposits above 500,000 EUR.

By mid morning European trade sentiment had settled a bit with EUR/USD regaining the 1.2950 level as short covering kicked in. Despite the hand wringing that accompanied the weekend deal, Cyprus may be a unique situation in the EZ both because of its tiny size and its well known reputation as money laundering center. Therefore, the financial deal offered Cyprus is not one that is likely to be repeated anywhere else in the EMU.

Still, the precedent of deposit confiscation is not one that investors in the EZ will quickly forget and as such the nervousness regarding the safety of funds in other periphery economies could persist for some time. The EUR/USD is likely to trade cautiously for the next few days with sellers likely on every rally. For now it appears to have weathered the storm with 1.2900 acting as support for the pair.

The most immediate risk for the pair is the vote in the Cypriot Parliament. Fully 70% of the population oppose this deal according to the latest polls, but the governing authorities may have no choice given the fact that banking system is insolvent and would collapse without the EU support. If the Cypriot Parliament approves the deal in whatever final form it takes, the market is likely to breath sigh of relief and EUR/USD could rally towards the 1.3000 handle.

However, if the Cypriot saga drags on, the damage to investor sentiment and the possible hoarding behavior that it could trigger from savers across the EZ could prove monumentally dangerous to the financial stability of the region and could precipitate a much steeper sell off in the EUR/USD over the next few days.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *