No relief for Cyprus and EUR



The situation in Cyprus continues to dominate the markets as we move from the Asian markets into the beginning of the European trading day. The EUR had a quiet overnight staying above the support level of 1.2920 and below resistance at 1.2980.

The latest news show the Cypriot Parliament voting on the bank levy later today. There has been talk of amending the original plan. That plan called for a 6.75% tax on deposits up to EUR 100,000 and a 9.9% tax on deposits above that. A new proposal would place a 15.5% levy on deposits of more than EUR 100,000 and no levy for deposits less than that amount.

One concern among investors that seems to be easing is the possibility that these levees could happen elsewhere. Many now consider the situation in Cyprus to be a one-off situation rather than the beginning of a new movement in the Eurozone.

One thing we know for sure. Euro finance ministers are not giving Cyprus any relief. No matter how the Cypriot government decides, it must raise EUR 5.8 billion from bank depositors in order to unlock the emergency loans that were agreed upon at last week’s EU Council meeting.

The Cypriot parliament vote will certainly be a close one. Cypriot President Anastasiades’s Disy party does not hold a majority in the 56 seat legislature. They hold only 20 seats. They need at least 9 more votes to get approval of any bank levy plan. The communist Akel party holds 19 seats, and the Edek party holds 5 seats. Both have stated that they will vote against the levy bill. The DIKO party has 8 seats and said they too would vote against the bill.

It is quite amazing how much of an effect a small country like Cyprus, which accounts for less than half of one percent of the EURO region economy can have. It isn’t only Cyprus however. This just adds to the uncertainty created by not having a government in Italy, Spain in the midst of a political scandal and Greece still struggling to meet the terms of its own bailout. Add to that the “stalling” European economy as a whole and one can see why the EUR is being pressured at this point.

As for trading today, expect some pressure on the EUR as I’d expect a “risk off” sentiment ahead of the parliamentary vote in Cyprus. Failure to come to an agreement later today could pressure the EUR as fears over possible bank collapse or even the departure of Cyprus from the euro-zone considered a possibility. The former is possible, but I don’t expect the latter. Failure to agree on a bailout would bring the ire of the ECB who would surely withdraw support for Cypriot banks if a bailout is not agreed upon.

Technically a break of 1.2920 could see a quick attempt at 1.2880.

In other currency news, BOJ head Shirakawa ends his tenure today and new governor Kuroda takes command. As most market observers expect a more aggressive easing policy to begin, the USD/JPY has moved comfortably above the 95.25 level and has tested 95.75 resistance overnight. While most traders expect the USD/JPY to continue to move higher, the talk of USD/JPY at 100.00 has quieted down for the moment.

AUD and CAD remain under pressure. AUD has tested support at 1.0225 and USD/CAD has tested resistance at 1.0230. With traders moving away from risk, I’d expect these two currencies to remain under pressure over the next few days.

The FOMC begins their two day meeting today, concluding tomorrow with the rate decision announcement at 12:30 pm EST and Chairman Bernanke’s press conference later in the day. All eyes will be on the Chairman as traders will look for clues on how the FED will handle future policies. More on that tomorrow.

For today, a wait and see attitude will prevail. Lately, the North American market tends to open and take the EUR higher to start. We will see if that continues.

Further reading: Forex Education: Margin Calculation for Cross-Currency Pairs




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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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