EUR/USD opened 100 pips lower at the opening of the Asian market breaking through the 1.29 barrier which has been a key resistance level of late. This move was on the back of news over the weekend that the ECB/EU/IMF bailout of Cyprus includes a 9.9% ‘tax’ on bank deposits. This figure is scaled down for deposits of anything less than 100k however that still comes in at 6.7% for the ordinary citizen.Now, the authorities have a problem on their hands. They’ve declared Tuesday a bank holiday (the day they have to pass the bill in Parliament) for fear of a ‘run’ on the banks. There is now fear of a dangerous precedent being set, in my opinion. Depositors funds were/are viewed as being sacrosanct. If the Cypriot Government, and this is a simplistic explanation, can take funds out of ordinary peoples account at will to stop the economy going ‘bust’ then what’s to stop a larger Eurozone country, such as the embattled Spain and Italy, from doing the same? I said in last week’s report that I see the fundamentals in the Eurozone as being “one move away from disaster again”. This Cypriot disaster, and that is actually what it is, as it’ll have, in my opinion, the complete opposite effect than the Government desired. Instead of ‘shoring’ up the economy it’ll damage already fragile confidence amongst investors, there will be a flow of capital out of the Country (both legal and, ahem, perhaps not so legal Russian deposits as they’re using the island to store not insignificant sums of money) and you’ll see the ordinary citizen taking money out of the ATMS.
So, where does this development leave us in terms of trading EUR/USD? After the initial dip overnight we’ve saw a rally back to around the 1.2960 level in the London session. My bearish outlook on EUR/USD hasn’t changed and if anything it’s been reinforced over the weekend. If you’re a buyer of USD from EUR the 1.30 level over the coming days looks toppish to me. Please contact me to discuss implementing a market order to execute at this level.
Our dear old friend Sterling has received a welcome boost from news released over the weekend from Cyprus. I’m bearish on Sterling and I’d suggest it’ll be a case of back to the ‘ugly parade’. Which one is worse, GBP or EUR? If you’re a buyer of EUR from GBP look to stagger your exposure at 50 pip intervals through utilising spot orders and take profit orders. Anything above 1.17 is ‘good value’, at the moment. This position could change dramatically over the coming days dependent on EUR strength or weakness. Sterling will be a relative bystander at the beginning of this week after the boost it received from Mervyn King on Friday saying they weren’t trying to deliberately weaken the Pound. Let’s just see shall we, the reaction, should the pound this year rise to around 1.30 on GBP/EUR due to Eurozone woes. I wonder with the export led recovery being triumphed for a considerable time will we see it hang around there for any length of time?
With all the market hesitancy from Cyprus look to work ‘OCO’s’ to offset your risk and capitalise on any upside from announcements over the coming days. Contact me to determine how to action this.
Cable has surprised me a little however I think this is more on the back of Mervyn King’s announcement than any real change in trend. I still view GBP/USD pushing lower over the 3 month with 1.45 my target level however if you’re a buyer of USD look to work some on spot and the rest of your exposure on orders with stop losses positioned to limit your downside risk.
I shall be writing another report midweek as there will be a number of developments over the coming days that will have a big impact in terms of the positioning of currencies and their direction for the coming weeks.
Could this be the beginning of the end for the Eurozone? We’ve been here before with Greece and it didn’t implode then. Whilst I think the whole premise is flawed the powers that be have too much to lose should the single currency implode. Will we see a large correction in the value of the EUR however? Quite possibly.
If you have any views on the above or any other FX related news please get in touch with ACM. Always happy to discuss the markets with our clients.
Have a great week.
Written by Liam Alexander