Cyprus ‘saved’ at the 11th hour by Europe in bailout deal. Should they have left the Euro? In my opinion, yes. They should have been ‘allowed’ to leave. The question last week of whom was going to cough up the cash to rescue Cyprus in principle has been agreed. The finer details, of course not. I guess everyone will worry about them later in the week/month as seems par for the course. The ‘bailout’ deal has left the banks with the ability to re-open and trade again. Yes, Cyprus has averted ‘financial Armageddon’ however will Cyprus, its economy, citizens and that of the Eurozone in fact be better off medium to long term? I’d suggest not.Let’s look at capital controls. In effect, no Cypriot citizen can move to another country at the moment. Freedom of movement is of course a fundamental right and yes there is no law being imposed to prevent a citizen moving country. However, you’d have to leave behind all your life savings and everything you’ve worked for as at the moment you can take the sum total of around 100 EUR per day out the bank. Transferring funds overseas is a pipe dream at the moment. What does this say about the ‘monetary union’ of the EU and has the single currency already in effect ceased to be just that? Yes, no formal capital restrictions are in place however they may as well be.
If Cyprus left the EUR, they would immediately devalue their currency (anyone remember Iceland? They’ve not done too badly after their exit have they in terms of GDP) foreign investors would look at the island as an opportunity, you would have an inflow of funds, with their weaker currency they could look to export their way back to recovery. Just an opinion and I’m sure there will be plenty of economists that will refute this as an idea however there will be many that agree. Oh, and I’m sure keeping the Russians onside isn’t such a bad move either!
So, what’s the bailout deal done to EUR/USD? Just as I said it would last week. We’ve had a ‘relief rally’ on EUR/USD with everyone saying “Phew, thank god for that” then the initial euphoria fades as everyone looks for the finer detail and realises there isn’t any! We went over the 1.30 level on the bailout news then we’ve reverted to the downside with a retracement back to around the 1.2930 level. As I’ve said for a while I’m bearish on EUR/USD and expect the retracement to continue to below the 1.27 level. I’m sure there will be upward movements on an intraday basis however I see more downside moves rather than any potential to the upside.
GBP/EUR? We’re bouncing around and pretty much dependent on any clear directional move from EUR/USD. I’d expect range bound trading to continue on this pair this week and with thinner liquidity end of week I don’t see too much movement. We’ll trade from around 1.1650 – 1.1850, at a push. If you’re a buyer of EUR from GBP contact me to implement take profit orders. With thinner markets end of week and data releases/commentary that are surprising you could see a large push to the upside on GBP/EUR. Look at orders around 1.18 the figure and also 1.1850. Look to protect your downside also however through utilising stop losses. Contact me to discuss working ‘OCO’s.
Cable? We’re under 1.52 and after the spike up after a slew of positive data we’re trading sideways at the moment. If you’re a buyer of USD look to cover off some of your exposure around these levels on a Spot basis and work orders to ‘average up’ your rate.
What do we have out this week in terms of data? The main event for Monday is the FED Chairman Ben Bernanke speaking at 17.15 GMT that will give us an idea on how he perceives the state of the US economy and the value of the Dollar. Expect some volatility around this speech.
Tuesday, we’ve got durable goods released from the US along with Consumer confidence figures. Switching to the UK, Wednesday will be the main day investors and businesses will be focusing on. We have the release of GDP (QoQ) (Q4) and (YoY) (Q4) with expected figures of -0.3% and 0.3% respectively. I’d be surprised if they didn’t come in lower than expectations with a sell-off of the pound coming during and right after the release pushing sterling crosses lower. Contact me to discuss hedging your Sterling currency risk this week.
We have employment data out of Germany on Thursday followed by GDP data out of the US on Thursday afternoon (UK time). We’ve a fairly lively week in terms of data releases so expect volatility across most major currencies.
Agree/disagree with any of the comments? Please get in touch as I’m always happy to debate the issues.
Have a great week.
Written by Liam Alexander