How will the 11th hour Cyprus Bailout affect the Forex

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This is a commentary from Richard Wiltshire, Chief Dealer of Foreign Exchange at ETX Capital.

As if to maximise dramatic effect, and as we sort of expected they would, Cyprus stumbles to an 11th hour, 10-bio Euro bailout deal with the Eurozone and Troika finance ministers.

The key features of which dictate that the country’s second largest lender, Cyprus Popular Bank, or Laiki as it is known, will undergo a “resolution” process that will see deposits under 100k transferred to a “good bank”, which will migrate to The Bank of Cyprus, whilst non performing loans and larger deposits will be placed in a “bad bank” which will be liquidated over the course of time.

For my mind, the Euro has held up well in the Forex markets over the last few weeks, and defended the key technical support areas of 1.2870/80 (200 DMA area) at the back end of last week, as we ebbed and flowed on the “will they won’t they?” scenario.

Indeed the initial dip on last night’s open, when a resolution wasn’t immediately forthcoming and President Anastasaides threatened to resign, was shallow (to 1.2940) and, as is generally the case when the market receives some perceived good news, we saw a spike in Euro crosses as buyers came in and squeezed the shorts. EUR/USD was trading up to 1.3050 where it failed, as participants seemed more than happy to fade the rally.

So what does this all mean for the beleaguered single currency going forwards? Well to use a sporting analogy, confidence is a brittle thing.  Whilst hard to build/win, it can evaporate very quickly, and let’s be honest; the whole situation has not exactly been handled well.  So despite assurances that Cyprus is a “one off,” investors are likely to remain wary as the Eurozone must surely now be more susceptible to bank deposit “runs”, in the event that a bank(s) comes under scrutiny and this will likely make any future instability even more extreme.

There has naturally been speculation that there will be large transfers out of Cyprus when the banks eventually reopen, but measures enforced late last week as part of the wider banking bailout plan should limit these. However, the fact that deposit insurance was seemingly taken so nonchalantly must surely make depositors ultra wary, in the near term at least.

Now we all know that hindsight is a wonderful thing, but the events of the last few weeks/days, and particularly the nature of some comments, largely emanating from Germany, means we have a cobbled together deal that doesn’t involve taxing regular depositors or refusing to acknowledge deposit insurance, but has managed to open up the can of worms and raise real fears of both at some possible stage in the future!  Fast forward to mid-morning on Monday in the European trading session and we have Moody’s warning on some French banks and Spain’s Bancaria shares are currently taking a hit.

As stated, Cyprus has pulled back from the precipice and is a smaller cog and rather unique economy, with regards to its banking sector and recapitalisation requirements, a “one off, special case”, but the concern has to be that a precedent is set, and fears spread once again to Italy or Spain, which is likely to keep any upside for the Euro in check as the situation plays out with 1.3000 area in EUR/USD likely to remain pivotal.

Initial support at 1.2980 could be key with a break below opening up a test of 1.2920/30 with stops below for 1.2840 area. A clean break of this level could open up 1.2660/90 lows, last seen in mid November last year.

Further consolidation in the 1.2980 to 1.3050 range may instil some confidence for a test above 1.3050/60, which would open up technical resistance level at 1.3130 (38.2% retracement). Above here stops are reported circa 1.3160 and a decisive break could see 1.3390/00 in play.

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

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