With a deal now in place to rescue the failing banking sector in Cyprus, fears about a larger contagion have eased, but slowing Eurozone fundamental data is likely to weigh on the EURUSD and other major currencies.
The currency markets breathed a sigh of relief and EURUSD popped on the news that Cyprus and the Eurozone reached a deal to resolve the banking crisis in the country, but the rally stalled ahead of the 1.3050 level as traders remained cautious about the fallout effects from the deal.
The Eurozone authorities and Cyprus agreed to protect depositors under EUR 100,000, although depositors above that level face unknown haircuts, and some experts estimate that the imposed levy could be as high as 40% of face value of their deposits. The deal also called for an effective closure of the Laiki bank, with deposits under EUR 100,000 to be transferred to the Bank of Cyprus.
The European Union has committed approximately 10 billion EUR in rescue funds for the Cypriot banking system, and once the respective parliaments approve the package, Cyprus should begin to receive the funds by May. The deal, as structured, does not require a fresh vote from the parliament of Cyprus, and as such, this removes the political risk that scuttled the first rescue attempt last week.
With the Cyprus deal now done, the Eurozone appears to have dodged yet another bullet, as fears of greater contagion begin to recede from the market, but the events of the past week only stand to highlight the dysfunctional state of affairs in the region’s banking sector and press the need for more banking union. New EU group president Jeroen Dijsselbloem made very much the same point in the post-announcement press conference.
The EURUSD, which remained remarkably resilient throughout the tumult last week, traded above the 1.3000 level in mid-morning European dealing as it tried to fill the gap left from last week's panicky open. The pair has found support at the 1.2850 level and is likely to stabilize and perhaps even extend its relief rally this week, but as attention turns away from Cyprus, the focus in the market is likely to return to the region's deteriorating fundamentals.
Last week's disappointing results in flash PMI reading from Germany and France suggest that the Eurozone will likely record its sixth consecutive quarter of contraction. This week, the economic calendar carries little event risk, but the latest German consumer confidence figures and retail sales reports should offer further clues about the state of demand in the region’s largest and most important economy.
See also: EUR/USD Facing Dangerous Double Whammy
Meanwhile, in North America today, the markets are likely to react positively to the resolution of the banking crisis in Cyprus, and EURUSD may get a further lift as tries to rally towards the 1.3050 level to fully fill the gap that has now been open for more than a week.
By Boris Schlossberg of BK Asset Management