Cyprus Boosting Gold vs Euro

The main reason the Cyprus “bank coup” rattled FX markets on Sunday night was the surprising haircut on depositors rather than a real concern of contagion.
Neither is Cyprus sufficiently in terms of size with regards to Eurozone (0.2% of Eurozone), but Eurozone peripheries are unlikely to use bail-in solutions.

The Cypriot banking sector is 7-8 times the size of the nation’s GDP, while the €70 bn in total banking deposits are 3 times the size of GDP.

Neither the Cypriot govt alone nor the EU/IMF could bailout the €70bn in banking deposits, especially as these are three times the size of the entire economy. And so it was agreed that Cyprus gets €17 bn (€1.4 bn in pvtzn receipts & rising corp tax)

The primary fear is that of “contagion”

-      Contagion used to be defined by selling across global markets on anticipation of  sovereigns’ possible failure to meet short term borrowing due to rising bond yields.

-      Today, contagion escalates on fears of bank runs in rest of Peripheral Ezone nations, especially in Italy where political gridlock may be further enforced  as anti-Europe sentiment  may be further justified by the hit on deposits in Cyprus.

Emerging chatter that Parliament may shift the burden onto bigger depositors (such as no levy on deposits of less than €20,000, 3%-7% levy on deposits up to €100,000 and 15% on deposits above € 50 million).

-      Cypriote parliament will confirm these proposals on Tuesday at 1400 GMT.

Euro Impact

EURUSD recovered off the 1.2880 support just above the 200 DMA following a plunge (gap down) in Asia Monday trading after Cyprus announced the €10 bn bailout would be financed by a 9.9% haircut on bank accounts at or above €100K and a 7% haircut on accounts below €100K.
EURUSD is expected to remain above 1.2830-50 support (confluence of 200 DMA & 55 WMA and below the 1.3130 resistance (100-DMA)

The next event risk for EURUSD will be the announcement from Cyprus. Also note the ECB said will provide the necessary liquidity if the Parliament approves the depositor-levy, so look out for a potential spike in the EURUSD after the Parliament’s announcement especially if there is a noticeable reduction in the burden on smaller depositors (below €20,000)

Do not forget the following

March German ZEW survey (investor participants) due on on Tuesday (has surprised on the upside for the last 3 months), followed by the FOMC announcement on Wednesday (may support EURUSD at 200-DMA as Fed maintains QE3 despite giving the nod to US econ improvement), Eurozone PMIs on Thursday (could be negative) and German IFO survey (economists & managers) on Friday (also has been surprising on the upside).

Gold vs Euro

Gold finally has a reason to rally aside from further central bank purchases. An unprecedented depositor-led bailout aimed at avoiding a run on banks  carries the shock value of destabilizing confidence, shake-off old assumptions about an ever-resent rescue from the ECB/IMF and opens a new Pandora box of “unknown unknowns”. Gold vs USD breaks its first 5-month string of losses (longest since 1997) and may be targeting 1625-28 before month-end. Yet, the faster-momentum pattern is in Gold vs. EUR; breaking an 18-week downward trendline and highlights similar upside as in May 2012  (Greek election impasse) and Nov-Dec 2011 (Italy debt selloff and political uncertainty). As the ascending weekly stochastics gain in strength, we could well see a break above the 100-WMA of 1250 and an extension towards 1,285. In order for EURUSD not to lose support below 1.2820-30, we will have to see a follow-up in Gold/USD towards 1645/50.