Euro Gets Real over Cyprus

<p>The balance between contagion fears and mixed economic fundamentals swung in favour of the euro on reports that the Cypriote Parliament has reached a deal […]</p>

The balance between contagion fears and mixed economic fundamentals swung in favour of the euro on reports that the Cypriote Parliament has reached a deal with regards to its banks and collecting the €6.7 bn from Cyprus instead of the previous €5.8 bn from deposits.

The focus on the Cyprus/Troika/Russia negotiations was highlighted (excessively) by the fact that EUR/USD posted its biggest advance in two weeks, despite evidence of slowing sentiment in Germany’s IFO survey. All three components of Germany’s IFO survey slowed in March, posting their first decline since September. The IFO Business climate slipped to 106.7 from 107.4. The report follows Tuesday’s release of a disappointing ZEW survey (focusing on investors) and Thursday’s release of a contraction in Germany’s flash manufacturing PMI release.

The euro’s medium term fortunes will continue to primarily rely on the likelihood for an ECB rate cut, which we deem to be minimal in H1 at this point. Shifting towards Italy, markets are also awaiting a decision from outgoing President Napolitano to grant DP’s Bersani the power to form a government as he controls the lower chamber and has the biggest number of seats in the Senate. If this option passes, then Bersani will explore the possibility of winning sufficient Senate support to win a confidence vote.

All Quiet on the Yields Front
The Cypriote panic hardly made a dent on periphery bonds. Yield on 10-year BTPs are down 9.4% since the election impasse of February 27. Spain’s 10-year bonos are down over the past four days after failing to close above 5.0%. Bonos yields have remained below 5% since the Italian election impasse in late February.

EUR/USD breaks out of its three-month downward channel after surviving above the important support of 1.2870 (confluence of 200-day moving average and 55-week moving average). We expect prolonged gains to taper off near the 1.3120-30s, were the 100-day moving average has imposed a ceiling since Feb 25. A subsequent retest of the 1.30 is then possible, before the bulls will have to take charge above 1.32, or else the US dollar’s bullish story will prevail at the expense of EUR/USD.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.