Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 20th of March.
There has been much noise after the International Monetary Fund and the European Union announced they planned to take money directly from the bank accounts in Cyprus as part of a bailout for the country. But the stock markets’ reaction across the globe has been muted. Europe shed less than one percent while in the US, investors chose to move on.
The reason is quite simple; it’s largely irrelevant to the global economy. Cyprus’ economy is small, it’s 0.2 percent of Europe; and the bailout is worth a measly $13 billion. But the larger issue of taking money from depositors to bailout a country seems overblown.
The approach in Cyprus may seem at odds with the notion that bailouts are meant to raise confidence in banks, so that depositors don’t flee. Questions are being raised whether future bailouts in countries like Spain and Italy, if they are needed, could affect depositors. But the fact is that the bailout in Cyprus says very little about future actions. And people in the region know that the Cypriot banking system is a very different animal, privately called a Trojan Donkey, than anywhere else in the euro zone.
Cyprus is different. Much of the big money deposited in its banks is from foreign investors, including wealthy Russians who have long been suspected of money laundering. Also they had fair warning that the island nation’s banks were troubled since the issue has been simmering for six months. Yet those investors chose to keep their money at the banks because they were gambling the banks will be bailed out at no cost to them.
Worse still, the strategy employed in Greece, in which bond holders of its sovereign debts had to accept losses, can’t be replicated in Cyprus. The country’s banks own much of the sovereign debts. So any attempt to force the bondholders to book losses will make the banks worse off.
Also, given the bloody history between Russia and much of Europe, and widespread speculation that much of the wealth is ill-gotten, it is clear why it will be so unpalatable to eurozone countries, Germany in particular, to bail out Russian oligarchs. German need to be reassured before elections next September that the taxpayer’s funds are not being used to bail out shady Russian depositors. Otherwise, Chancellor Angela Merkel will lose the election.
It is very unlikely politicians will choose the Cyprus model in a country like Spain or Italy because a run on the banks in those countries will have global implications.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1695
GBP/US$ – 1.5095
GBP/CHF – 1.4296
GBP/CAN$ – 1.5502
GBP/AUS$ – 1.4542
GBP/ZAR – 13.9542
GBP/JPY – 143.89
GBP/HKD – 11.7053
GBP/NZD – 1.8351
GBP/SEK – 9.7432
EUR: The single-currency slipped to a four-month low versus the US dollar on Tuesday as the voting fiasco in Cyprus fuel demand for safer assets. The euro skidded to a low of 1.2843 amid stock market jitters as Cypriot lawmakers rejected a one off levy on bank deposits to meet terms for a bailout. Cyprus has to find another way now to raise EUR 5.8 billion to meet the conditions put forward by the IMF and the EU, and if it fails to meet the target, it could lead to a default and subsequent exit from the eurozone. Euro trimmed losses later in the session, but still shed 0.5 percent against the US dollar as demand for safer assets spiked. EU current account data is the major release due from the region today and don’t be surprised if the reading falls short of estimates. Cyprus is expected to dominate headlines today, but with the FED and BoE releases due too, expect significant moves in euro crosses.
USD: The US dollar performed relatively better yesterday as risk sentiments weakened following news coming out from the eurozone. Aside from making significant gains against the euro, the US dollar advanced majority of its most traded rivals after housing starts and home construction permit data both beat street estimates. The ICE dollar index, a gauge of the US currency’s strength against a basket of six global currencies, rose 0.3 percent to 82.911. While developments in Cyprus are expected to dominate market chatter today, economic forecasts by the Federal Open market Committee will be closely monitored by market analysts. Cable has consolidated over the past 24 hours and the GBP/USD pair is trading above the 1.510 level.
Have a great day!
