2013-03-25 10:28 (UTC)
XE Market Analysis
European markets digested the Cyprus deal, which was welcomed as it reduced the risk of contagion and also kept intact the EUR 100k deposit guarantee. However, the narrative over the last week has undermined eurozone credibility and caution set in after the intial EUR rally. There is uncertainty over the consequences for other weak eurozone member states that run into trouble after depositors over EUR 100k are set to take a large haircut, though Cyprus may well be an isolated case as it sought to attract large offshore investment through relaxed tax laws. Elsewhere, GBP was mixed, with Cable holding above 1.5200, yet off highs over 1.5250 after EUR-GBP rallied from 0.8500 to 0.8560. The commodity bloc performed well, which lifted AUD above 1.0475 and USD-CAD broke 1.0200.[EUR, USD]
EUR-USD consolidated after the knee-jerk reaction to the Cyprus deal overnight. After rallying from 1.2940 to 1.3050 European accounts sold into strength. EUR corrected to 1.2985 by early Europe as European participants evaluated the various components of the Cyprus deal and the long-term impact. For now, the risk of eurozone contagion has dissipated but the big haircut on depositors over EUR 100k sets an uncomfortable precedent for investors and raises fears for other member states that run into trouble despite assurances that Cyprus is a special case. The significant drop off in banking activity in Cyprus will also weigh on tax revenue and the service sector industry may also suffer, which could weigh heavily on the economy and and the fiscal position. Like Greece, this may not be the last time we hear about financial assistance for Cyprus.[USD, JPY]
USD-JPY and the JPY crosses headed higher after risk appetite improved after Cyprus reached a deal, which kept it in the eurozone. USD-JPY rallied out of 94.30 to reach the 95.00 area. Further gains were limited by Japanese exporter offers, which may increase over the course of the week due to the Japanese fiscal year-end. EUR-JPY was boosted out of early lows of 122.10 and reached 123.85. Offers from the 124.00 region limited further gains and it edged back towards 123.30 by late Asia.[GBP, USD]
Cable is holding on to 1.5200, with the underlying tone still supportive since it corrected from trend lows in mid-March. There was no lasting impact after Fitch cut the U.K. outlook to negative, which was no unexpected after the U.K. Budget after the government maintained its focus on austerity despite fairly flat growth outlook. GBP has benefited though on BoE rhetorics with the recent sterling weakness becoming a source of concern due to inflationary pressures. There is also potential positive M&A flows ahead after the Sunday Times said that Vodafone could exit the U.S. and has held talks over the sale of its 45% stake in Verizon Wireless. A sale based on current share prices would be worth around GBP 88 bln and Vodafone has also benefited significantly from the pound's drop since the start of the year.[USD, CHF]
EUR-CHF traded off EUR-USD movement. News of the Cyprus deal enabled it to trade from 1.2205 back over 1.2250 in Asia. However, it could not sustain higher levels as EUR selling pressure picked up on strength. EUR-CHF drifted back to back to 1.2230 by late Asia and then extended to 1.2215 after the European open. USD-CHF was choppy around 0.9400, which was softer than recent levels as the USD lost some of its safe haven bid, but may still benefit on dips as economic fundamental are likely to influence as eurozone uncertainty recedes to the background.[USD, CAD]
USD-CAD triggered stops after it broke 1.0200 during the European morning. News that Cyprus reached a deal in order to get a bailout boosted risk appetite and in turn the commodity bloc currencies. The move higher in CAD$ came in tandem with AUD, which cleared 1.0475. The USD-CAD move under 1.0200 sets it up for a potential test of mid-March lows around 1.0180, where good support is noted. Offers on the topside are noted from 1.0250-60.