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Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

2013-03-22 11:37:00
Christopher Vecchio, CFA, Senior Strategist
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ASIA/EUROPE FOREX NEWS WRAP

‘This is it’ – the proverbial moment when the fate of global sentiment for the coming weeks and months will be decided. Cypriot parliament members are reconvening today to legislate on new measures that would result in a deposit tax being levied against account holders with €100,000 or more saved up, now that the European Troika has rejected the Cypriot government’s ‘Plan B’ for a sovereign solidarity fund.

Tensions are running high. Within the last hour, a Cypriot government spokesperson said that the fate of the country’s inclusion in the Euro-zone would be decided over the course of the next few hours. Essentially, there are only two choices: accept the Troika’s demands for the deposit tax in order to unlock the necessary bailout funds required to keep the nation from defaulting; or leave the Euro-zone and face imminent default.

Without a deal on the table, and the window for negotiations over the weekend closing, the Cypriot economy could collapse next week now that the European Central Bank has pledged to turn off the liquidity spigot on Monday, ahead of when banks reopen on Tuesday. Reuters is reporting that Cypriot leaders are moving to implement capital controls ahead of the banks reopening on Tuesday, to prevent massive capital flight.

Amidst these harrowing developments, the Euro has consolidated across the board, in particular against the US Dollar (the EURJPY has been a bit more volatile, but remains well-contained). If the crisis is heating up as I suspect it is, part of the reason why the Euro might not be selling off so sharply – yet – is due to repatriation flows, or investors retrieving their Euros from abroad by selling the foreign currency and converting them back into Euros. We saw repatriation flows support the EURUSD rate in the 1Q’12.

Taking a look at European credit, peripheral yields have continued their compression, as the Euro’s credit influences are well-insulated from the Cypriot mess. The Italian 2-year note yield has decreased to 1.767% (-1.6-bps) while the Spanish 2-year note yield has decreased to 2.228% (-4.7-bps). Likewise, the Italian 10-year note yield has decreased to 4.538% (-3.8-bps) while the Spanish 10-year note yield has decreased to 4.822% (-3.3-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

JPY: +0.41%

EUR: +0.26%

GBP: +0.20%

CHF:+0.14%

CAD:-0.01%

NZD:-0.01%

AUD:-0.06%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.24% (-0.45% past 5-days)

ECONOMIC CALENDAR

There are no significant data releases or events on the economic docket on Friday, March 22.

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

Euro_Continues_Consolidation_as_Cyprus_Bailout_Negotiations_Reach_Apex_body_Picture_6.png, Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

EURUSD: Another Inside Day after yesterday’s Inside Day has a potential Bearish Symmetrical Triangle forming on the 4H/daily time frames, a notable continuation pattern that points to fresh yearly lows. However, key support remains at 1.2860/80, for the same three reasons: the 50.0% Fibonacci retracement on the July 24 low to the February 1 high; the 200-DMA; and the late-November and early-December swing lows. Accordingly, a resolution out of Cyprus is likely to drive a move in either direction; I remain open to both possibilities given heavy fundamental risk. Resistance is at 1.2955/60 (8-EMA) and 1.3040/50 (21-EMA).

Euro_Continues_Consolidation_as_Cyprus_Bailout_Negotiations_Reach_Apex_body_Picture_5.png, Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

USDJPY: The USDJPY continues to range in an ascending channel, as it has been since the start of the year, with another test of the 21-EMA occurring today. However, with recent swing lows at 93.00 coinciding with the bottom rail of the ascending channel, a further drop – coinciding with a pullback in US equities or a rally in precious metals – looks to be bought, as the divergence between Fed and BoJ policies continues to grow. A weekly close above 96.00 eyes 97.00, 97.70, and 98.50/80 to the upside. Below 93.00, critical support doesn’t appear until 90.00/50.

Euro_Continues_Consolidation_as_Cyprus_Bailout_Negotiations_Reach_Apex_body_Picture_4.png, Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

GBPUSD: No change, though the Bull Flag first noted yesterday appears to be materializing: “The Bullish Falling Wedge pattern noted last week has thus far played out, but now a Bull Flag may be forming on the daily chart, with the 100% swing extensions coming in at 1.5285, just short of the key 1.5300 former range support from 2010 through early-2013. I maintain that “reselling this area for new lows makes sense, it being major support over the past several years – the range dating back to August 2010, from 1.5300 to 1.6300.”” Resistance comes in at 1.5285/375. Support comes in at 1.5160/70 (21-EMA), 1.5115/20 (8-EMA), and 1.4830/40.

Euro_Continues_Consolidation_as_Cyprus_Bailout_Negotiations_Reach_Apex_body_Picture_3.png, Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

AUDUSD:Throughout mid-March I’ve said that “a break of 1.0340/80 points to 1.0460/80. An alternative bullish view of an Inverse Head & Shoulders may have formed on the 4H chart…it is worth noting that a bullish 8-/21-EMA crossover is in place on the daily chart, so the March low at 1.0110 may have been set.” Now that 1.0340/80 has been cleared, and a Bullish Symmetrical triangle on the 4H/daily time frames yielded a positive result, I will look into 1.0460/80 and 1.0495/520 as potential resistance higher.

Euro_Continues_Consolidation_as_Cyprus_Bailout_Negotiations_Reach_Apex_body_Picture_2.png, Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”

Euro_Continues_Consolidation_as_Cyprus_Bailout_Negotiations_Reach_Apex_body_Picture_1.png, Euro Continues Consolidation as Cyprus Bailout Negotiations Reach Apex

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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