The Euro has shed earlier gains and now trades little changed after Cyprus and the EU agreed to a bailout deal as capital flight fears continue to linger.
Talking Points
Euro Yields Tepid Response to Cyprus Bailout Deal as Capital Flight Fears
Japanese Yen Declined as Stocks Rose in Asia, Denting Safe-Haven Demand
The major currencies are little changed in overnight trade. The Japanese Yen is broadly underperforming as Asian stocks advance, sapping demand for the regional haven currency. The MSCI Asia Pacific benchmark equity index has added 0.9 percent after Cyprus and the so-called “troika” (EU/ECB/IMF) agreed to measures paving the way for launch of the country’s bailout program. The Euro spiked higher as the news of the deal emerged but the single currency has since retreated as worries about the impact of the Cyprus fiasco on depositor confidence elsewhere in single currency bloc continue to swirl.
The package of measures emerging out of the weekend’s negotiations focuses most specifically on Laiki Bank, Cyprus’ second-largest lender. The bank will be split, with unsecured deposits (all those over €100,000) transferred to a so-called “bad bank” and eventually wound up. Losses to unsecured depositors from this move are being estimated at 30-40 percent. Secured deposits and performing assets will be moved to Bank of Cyprus. This process is expected to raise €4.2 billion. The Cypriot government will further use privatization and taxation to generate additional funding to move toward unlocking €10 billion in EU aid, a process expected to conclude by mid-April.
On balance, investors’ lack of enthusiasm for the bailout seems reasonable. The critical issue remains that of precedent for larger Eurozone countries, and the way in which the Cyprus situation has been managed does not seem to inspire a great deal of confidence. Depositors in countries with similarly sickly banking sectors (notably Spain) are unlikely to be greatly encouraged by the prospect of losing close to a third of their deposits over €100k with the EU’s blessing if trouble were to arise. Cyprus’ introduction of capital controls to prevent a bank run when lending institutions reopen for business, again with approval from Brussels, is unlikely to sit well also.
This raises the most important question of all: why should a depositor in Spain or a country similarly vulnerable to a banking crisis expect to be left unscathed if a Cyprus-like calamity were to befall them. If such an expectation is deemed unreasonable in light of today’s events, the borrower in question may well opt not to keep money in the Eurozone altogether, and he/she may not be alone. This leaves the markets waiting to see if a mass exodus of capital does indeed occur as the region digests the latest news-flow, for then the worst-case scenario will be upon the Eurozone whether or not Cyprus receives its aid.
Asia Session:
GMT
CCY
EVENT
ACT
EXP
PREV
0:01
GBP
Hometrack Housing Survey (MoM) (MAR)
0.3%
–
0.1%
0:01
GBP
Hometrack Housing Survey (YoY) (MAR)
0.0%
–
-0.1%
Euro Session:
GMT
CCY
EVENT
EXP/ACT
PREV
IMPACT
9:00
EUR
Italian Consumer Confidence Index (MAR)
85.2 (A)
86.0
Low
9:30
GBP
BBA Loans for House Purchase (FEB)
30506 (A)
31983 (R-)
Medium
10:00
EUR
Italy to Sell 2014 Bonds, 2018-23 I/L Bonds
–
–
Medium
Critical Levels:
CCY
SUPPORT
RESISTANCE
EURUSD
1.2915
1.3084
GBPUSD
1.5181
1.5263
— Written by Ilya Spivak, Currency Strategist for Dailyfx.com
To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak
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Source: Daily fx