Richard Wiltshire is Chief of Foreign Exchange Dealing at ETX Capital – a spread betting company in London.
After what seemed like an eternity, EU and IMF representatives finally agreed upon bailout conditions for Cyprus. The 11th hour deal on Sunday evening means that Cyprus will be receiving the €10billion it needs to refinance its beleaguered banks, but will it have ramifications in the currency market?
The bailout conditions state that Cyprus’ two biggest banks, The Bank of Cyprus and Laiki, will be split into a “good bank” and “bad bank” respectively. The premise that sparked the bank run in the country last week, a tax on all depositors, has now been avoided, with deposits below €100k being protected by the new good bank. However, larger deposits and underperforming loans will be “reformed” by the bad bank, effectively resulting in a tax for deposits above €100k.
During the sustained talks last week, the Euro performed relatively strongly, perhaps being galvanised by rumour risk sentiment. The EUR/USD pair defended a key support level of the 200 DMA, which came in at 1.2870/80.
Indeed, risk sentiment looked to be strong when the positive news emerged on the bailout on Sunday night. The 1.3050 level was reached in the EUR/USD pair before profit takers came in and the cross even survived a dip to 1.2940 when Cypriot president Anastasiades threatened resignation.
Can this risk sentiment be maintained? Well, at looks as though any rally that was there has been overwhelmed by bearish tones.
The Cyprus agreement was something of a catastrophe for the IMF and the Troika, particularly after seeing the massive flight of capital from the island nation last week. Ministers have been quick to point out that the Cyprus case is unique and a “one-off”, but further bank runs in Cyprus are expected this week and could be followed in Greece, Spain or Italy.
This is because of the comments made by Eurogroup President Jeroen Dijsselbloem, who stated that the Cyprus deal could be a new “template” on how the IMF and Troika will handle bailout negotiations from now on. This means that we could see further action taken against depositors, with the natural reaction for those wanting to protect their investments being to withdraw them from the banks.
A precedent has most certainly been set. Germany’s rhetoric over the negotiations shows that they are keen on the idea of taxing depositors to fund bailout money – and Germany often gets its way. Despite the assurances, investors will be wondering what is stopping the paymasters from applying this medicine to Spanish and Italian banks in the future.
Monday saw Moody’s issue a credit rating warning to several French banks and shares in the Spanish bank Bancaria took a dive at the start of the week as well. With the Euro consolidating the sentiment by falling below 1.300, it would appear that the bears are controlling the market as of late.
The risk of similar measures spreading to bigger economies like Spain or Italy is very real. Cyprus is also not certain to remain in the single currency, adding a whole different contagion argument. This negative outlook will probably keep the Euro under wraps in some crosses, with a bearish outlook for the short term. The EUR/USD pair is likely to see the 1.3000 range be a significant level for the bears.
We’ve broken through support at 1.2980 and we appear to have gone through 1.2920/30 support as well. Stops below for the 1.2840 area wait. In the long-term, a clean break of this level could open up 1.2660/90 lows, last seen in mid November last year.
For the bulls out there, if we consolidate in the 1.2980 to 1.3050 range, the market may gain 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.
