Dijsselbomb

Data/Event Risks

• USD:  Durable goods data always a fairly volatile one so can knock the dollar if weaker, but generally the market has a strong ability to shake the data off.
• EUR: Focus on events in Cyprus and further details on the likely hit to larger depositers (over EUR 100K).   The single currency is proving sensitive to longer-term considerations, as the reaction to comments from head of the Eurogroup Dijsselbloem showed yesterday.

Idea of the Day

The euro was already displaying a classic “buy the rumour, sell the fact” move in the wake of the Cyprus deal yesterday morning but was pushed into the European close by comments from the Dutch Finance Minister who leads the grouping of Eurozone finance ministers (Dijsselbloem).

From saying last week that the situation in Cyprus was ‘unique’ he yesterday said it was a template for other potential bank restructurings in the Eurozone. This marked an abrupt change of emphasis, one which translates to making the debt-holders, shareholders and uninsured depositors pay for the risks taken on in banks, rather than having tax payers bail them out.

Now, in theory that’s not such a bad idea and a place where most governments around the world want to get to. The trouble is that banks are still too large and cumbersome for this to be the case.   So markets were somewhat surprised by the change of emphasis.   That said, this does underpin our view that fallout from the Cyprus deal is something that is going to bear down on the single currency in the coming weeks. Cyprus may be small, but the damage to the single currency’s viability and the EU’s political reputation has been larger than for any other previous bailout.

Latest FX News

• EUR: The “Dijsselbomb” pressured EURUSD down to the 200d moving average at 1.2881 and key Fibonacci level at 1.2877 to touch 1.2830.   We’ve seen a marginal recovery during the Asia session, but the renewed uncertainty is likely to hang over the single currency.
• GBP:  Sterling was largely drifting on Monday, but was higher vs. the EUR as the single currency was weighed down in the wake of the Cyprus deal.
• JPY:  More comments from the new BoJ Governor Kuroda overnight, again suggesting that the BoJ may extend the maturities of bonds purchased under its quantitative easing program.
• AUD: Touched a 2-month high at 1.0480 and remained well supported overnight.   No mention of monetary policy in latest speech by RBA governor Stevens overnight, which has added some support as market becomes more confident that rate cuts are not on the agenda.

Further reading:  EURUSD Could Fall Much Lower In 2013 (Elliott Wave Analysis)