Macro Morning: Cyprus FAIL!

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.

euraud, eur, aud euro versus australian dollar, euro australian dollar price quote, euraud

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.

Data

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

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Comments

  1. “…nothing is off the table and…the( people) have no say.” And that’s what’s going to make an increasing mess of your charts!

    • Deus Forex Machina

      Don’t like charts Janet????

      My process has stood me in good stead for most of the past 25 years so I’ll just have to stick with it come what may.

      Cheers

      Greg

      • It’s not that, Greg. It’s because the last 25 years worked that they probably won’t now. Charting is really the study of past human behaviour,is it not? And given that the ‘human’ bit has been removed from all asset markets at the moment, how can they work?

        • Deus Forex Machina

          C’mon

          I don’t buy your premise that humans are removed from the markets

          charts work because they work as you say – they are a measure of human psychology nothing more nothing less…that’s why they work and that has not changed in thousands of years

          Governmental stuff is just a peripheral influence that impacts at the margin until they shut or ban markets.

          Take euro for example if you we long at the close at 1.3073 the open was 1.2920ish so you lost a little more than 1%. That is nothing in the grand scheme of things when shares drop multiple percentages because a stock misssed by a penny.

          Unless they ban humans from markets charts will always be an importaant part of my investing and trading toolkit

          cheers

          greg

          • I’m with Janet on this.The US Markets are completely rigged. The large Banks & Hedge Funds are gaming the markets like never before.

            It is not possible for charts to be of any use in Markets such as this.

          • I read somewhere that HFT programmes account for about 70% of all trading in western markets these days. Could that be taking the human element out of charts? I know the algos are written by humans but quants arent exactly your typical human.

          • Deus Forex Machina

            Yes Vortex on stocks that apparently is right and I’m sure in FX they are about to…but HFT guys are just that – they are in and out in milli or nano seconds exploiting a technological advantage and abitrage that opens up as a result and so in the big scheme of things I dont think they disrupt trends.

            that is not to say I favour them but in reality they are just the 2013 version of the locals on the futures pits in the 1980’s…

            clip, clip, clip…clip that coupon

            cheers

            greg

        • Thanks Greg, and after further thought I agree with you about HFT not changing the trend. Because the market is made up of over 6 billion people living a certain way.(each making separate choices). The trend is far too powerful to manipulate long term. But we can throw away the tick charts.

          • Deus Forex Machina

            yeah that is true…15 minutes is about the minimum time frame I look at these days

          • FWIW, I’m with Greg, I think charts have become more erratic on the smaller timeframes (HFT?) & maybe Gold is gamed more? I’ve had to up my timeframe & widen my stops (more risk) to allow for the stunts that are being pulled around the world of FX. There was once a time when I could use 5min TF’s, but now I would rarely go under 1h. Incidentally I’m trading less & making more, now I’ve been forced to pull my nose further away from the noise 🙂

            I’ll admit it’s not easy for me to wait longer for the trade to unfold though.

  2. I really wouldn’t want to be a ECB or Cypriot finance ministry apparatchik with exposure to this.

    The Oligarchs have long memories and backing by state actors.

  3. “Gold is at $1594 and if Cyprus doesn’t kick it toward $1619 nothing will.”

    There have been quite a few currency or market related events which should have boosted Gold over the last couple of years. Markets don’t always react the way we expect them to!

    That said I just checked the Gold chart on Kitco and looks like we might just be seeing the expected result on this occasion 😉

      • …then, IMHO, probably up to $1650, before a sell-off back to around $1590/$1600ish.

        My personal thesis is, and will remain for quite some time, that the march towards gold will be slow and reluctant, with some significant volatility in between, as rallies form and “pop”, to eventually find major bottoms that are slightly higher than the last. A lot of noise. A lot of buying the dip.

        Note: I must say I was actually surpised just how “well” gold heldthe $1575/$1580 region – wow – amongst all that technical pressure, and for, what, a week or so trading a 1%-odd range?!?!. For me that was incredible support, and signalled a major bottom.

        IMO, people are still figuring out what eachother actually THINK GOLD IS FOR (!), what its function is for the masses. For me, gold is still having an identity crisis, and will do so for some time yet (years).

        And i’m a gold/PM bull!

        My 2c

        • If you have a European bank account and you are an individual/family/business/trust and you felt that your wealth was subject to confiscation at the whim of some officials in a foreign country ask yourself what you might do. Run on the bank ? A better store of wealth?

          I really don’t know how it could be put more clearly. Governing bodies are coming for your wealth. This is 10% supposedly. Surely, this won’t happen again? Well, if I was Portugese, Spanish, Italian or French I would be sniffing around for insurance. That doesn’t even begin to cover the Millions of account holders from non-euro countries from the Americas , Asia , Africa, Middle East and Russia. Too early to tell just yet, but every inferno starts with a spark somewhere.

  4. The herd just stopped grazing and lifted it’s collective head- ” what’s that rumbling sound over the hill?”.

    All gold has to do here is put in a solid bottom. That is enough for now.

    • IMHO, gold just DID put in a solid bottom at ~$1575. I’m bullish on the stuff, and even i was impressed with its resilience bumping along at $1575 for so long, with breaks below being bought up incredibly quickly!

      • You can be sure Bernank, King et al are feverishly working every which way they know to keep the price of gold down. Their cash resources are, in their view, unlimited so they can absorb losses in the process.

        If Gold gets away from then CB policies will start to be thought of as what they really are.

        I guess it’s a question of ‘How long can this go on for?’

  5. Do the right thing, save money and then get it stolen from you by the people who have driven your country’s economy to the edge – bankers.

    There is going to be rioting in the streets over this one and I don’t blame the Cypriots at all for doing so.

  6. Wow, even I thought the govt would not commit outright theft on savers, I thought they might at least be more subtle by the usual means of money printing, tax breaks for speculators etc. this is just insane.

  7. I have been reading macrobusiness for about two or three years now, in the hope of learning what I might best do to remain financially secure. I have learned a lot, but not enough.
    I can’t understand how, should there be a bank run ie, no-one can get cash for next weeks groceries, having a bar of gold under the bed gets you to buy next weeks groceries. Can the usual family in Cyprus take their gold bar down to the market and get shoes for the new school year, and grandma’s medication etc?

    No-one need answer, I will keep reading.

    I am working on ways to make banks irrevelant to my day to day life however.
    Hard, but not impossible.