Marshall Gittler, head of Global FX Strategy at IronFX, says the value of the euro against other key currencies will remain slave to the situation as it develops in Cyprus ahead of Monday's liquidity deadline put in place by the ECB.
Marshall Gittler, head of Global FX Strategy at IronFX, says the value of the euro against other key currencies will remain slave to the situation as it develops in Cyprus ahead of Monday’s liquidity deadline put in place by the ECB.
EUR weakness was the theme overnight, answering the question that I asked yesterday in the affirmative: yes, Cyprus does matter for the markets. The ECB set a deadline of next Monday for the supply of funds to the island’s troubled banks; if there’s no settlement by then, they will pull the liquidity plug. Russia PM Medvedev’s threat to review the share of euros in its international currency reserves is emblematic of how this issue has caused the return of a risk premium to the euro.
Sentiment for the euro was also damaged by weaker-than-expected purchasing managers’ indices, which showed industry in the Eurozone contracting at an accelerating pace. This was in contrast with the US, where the manufacturing PMI showed accelerating expansion at a bit slower pace than expected.
The increasing eurozone jitters have rekindled interest in safe havens: gold and silver gained, JPY rose despite dovish comments by the new BoJ Governor Kuroda, and CHF nearly kept pace with the dollar. Yet the successful auction of Spanish bonds yesterday, with the country managing to sell more bonds than it had aimed for at a lower yield than in February, shows that not every investor has lost faith in the eurozone.
About the only economic indicator out today will be Germany’s IFO index, but the market is likely to focus on Cyprus. Parliament convenes at 10 AM Cyprus time (0800 GMT) to consider proposals for restructuring the banks, putting on capital restrictions and creating an Investment Solidarity Fund to raise the remaining funds. Any sign that they are having difficulty putting together package that would be acceptable to the EU is likely to cause further demand for the above-mentioned safe haven assets.
The euro will be a slave to events today, watching what goes on in Cyprus. The threat of the EU pulling the plug on the banking system, the odd idea of capital controls in a currency union, and the remote but now non-negligible possibility that Cyprus might have to leave the eurozone if things get really bad – all this is likely to weigh on the so-called single currency.
EURUSD yesterday found support a number of times at the area that concentrates the 200-day MA, lower Bollinger band, and the 50% retracement level of the July – February rally. The 1.2865 – 1.2885 seems to be the support level for now, which may be tested again depending on the outcome and the perceived success of the Cyprus Parliament vote on the bailout plan. Weak resistance looks to come at the 1.2920 – 1.2940 area.
In his inaugural press conference on his first day in office, the new BoJ governor H. Kuroda, said he’s confident that the BoJ will be able to achieve the government’s 2% inflation target “at the earliest time possible.” But he didn’t mention any concrete actions he would take to achieve this goal. Japanese 5yr breakeven inflation rates are down about 16 bps over the last week to 1.38%, suggesting the market isn’t entirely convinced.
Any further USDJPY fall is likely to find trendline support at 94.00.