The Cyprus ‘bail in’ of depositors and the butterfly effect that this might have on banks across the Eurozone in almost every nation except maybe Finland and Germany has knocked the euro and Aussie substantially lower this morning. The euro closed the week at 1.3073 yet this morning in early Asian trade it sits at 1.2930. The Aussie is not off quite so much having closed the week at 1.0413 and only trading at 1.0355 as we write.
The key problem in the Cypriot bail out is the haircut that depositors have to take to help pay for the rescue package. Reports out of the FT are that it was the doctrinaire overlords of Finland and Germany who pushed this plan onto the rescue, which is interesting given that the euro insulates both nations from the destruction that would be being wrought on their economies if the euro didn’t exist. That is the Markka and the Deustchemark would be going through the roof and severely draining the competitiveness and resources of both nations. Indeed you could argue that a common market with free floating currencies is preferable to anything other than full fiscal transfer as the exchange rate would make the adjustment for you. But that horse has bolted.
Anyway it seems to have been lost on the EU group that even though Cyrpus is a tiny little island chock full of Russian deposits that if they bailed in your average Neoklis or Maria in Cyprus why not your average depositor in Greece, Italy, Spain or even the UK given the trouble that the banks have caused that economy and the cost to the cash strapped UK government. It is truly a Pandora’s box or Amazonian butterfly.
It is early doors Asia so by this time tomorrow we may be saying it was all a little bit of panic and a storm in a tea cup but whatever the reaction in the next 24 hours it seems that the EU has sent a very strong signal to the population that nothing is off the table and that they have no say. This is important in an Italian context as Beppe Grillo has already strengthened and expanded his power base and would be expected to have a bigger portion of the votes if Italy goes to another election. Equally in Spain and other nations the hands of the nationalists has been strengthened. I am at risk of letting my rhetoric get in the way of my trading here but gee whiz European politicians are undemocratic and disconnected from the populations they are supposed to serve.
Anyway, even though the Aussie is under pressure this morning there is a strong chance that at least against Europe it gets a bid tone as it is one of the few countries in the developed world where the chance of getting bailed in at the moment is effectively zero.
So the Aussie might actually get a genuine safe haven bid against the euro and some other currencies. Safe haven in the sense that your deposits in Australia are safe from hair cuts regardless of what happens overseas. So EURAUD could be headed substantially lower.
The set up for this cross was for a rally back toward the fast moving average but should it take out the recent low then a move toward the 200 day moving average at 1.2385 is in train and if that breaks then 1.2290 and then the low of last year at 1.2150 opens up.
The yen is also likely to get catch a bid against the euro and perhaps against the US dollar as well on the back of safe haven flow although it is worth noting the doves have been appointed to the BoJ as expected which might slow things down a little. The GBP is likely to come under pressure as well given it has some of the same problems that Cyprus and the rest of Europe has with regard to its banks and banking system.
Looking at the stock market performance Friday saw a weaker end to the week in the US with the Dow down 0.17% to 14,514, the Nasdaq fell 0.30% and the S&P missed the all-time high closing at 1,561 down 0.14%. The Reuters Michigan Consumer Confidence data fell to 71.8 from 77.6 but Industrial Production rose 0.7% versus the 0.4% expected and capacity utilisation was higher than expected.
In Europe stocks were also lower with falls across the board. The FTSE fell 0.60%, the CAC dropped 0.71% but the DAX only dropped 0.19%. Both Italian and Spanish stock markets fell 0.45% and 0.43% respectively.
On Commodity markets Nymex crude was up again to $93.45 with a gain of 0.45%. Gold is at $1594 and if Cyprus doesn’t kick it toward $1619 nothing will. Silver is at $28.77 oz and likely to also increase.
This week the Fed meets and we find it hard to believe they won’t make some reference to the improving US economy and thus their discussions around stimulus withdrawal. We’ll know on Thursday.
Today in Australia we have the miracle number of new motor vehicle sales. This data has persistently amazed with its strength but surely it has to slow soon????
Twitter: Greg McKenna
Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility and you should consult your investment or financial adviser before making any investments.