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Agitation in Euro land as Cyprus savers face wealth destruction

FXstreet.com (Barcelona) - The stunning decision in Cyprus, where the government plans to establish a bank deposit levy to its citizens, has thrown cold water on the European common currency. The proposed assault on the people's savings to take a percentage of deposits in between 6.75% and 9.9% has led to a rampage of spooky headlines ahead of the European open.

Some examples from headlines no buyers would like to ever see can be found below:

- "Alarm over savings tax spreads fear across EU, the Financial Times front cover

- Cyprus could vote to leave the euro, political dynamite, from the Telegraph

- People are panicking, they’re afraid of losing their money, the Guardian

The EUR/USD, which saw strong demand late last week, lifting the rate from a depressed $1.29 up to $1.31, has been, again, debilitated to the point of testing bids below the 1.29 ahead of what is expected to be an agitated European session.

Despite the perceived Euro value has been taken to an extreme where interest to become a Euro buyer at short term cheap wholesale prices may arise, there are two key themes holding back big players from participating in the market.

As reported earlier by FXstreet.com fundamental team: "Firstly, there is huge a uncertainty over how much this decision will impact confidence around other peripheral countries, as the prospect of a bold robbery to hard-earned small saver's bank deposits sets a dangerous precedent within the Eurozone. More capital flights in other countries may follow..."

"Secondly, the fact that up until now, reports coming in suggest the bank tax levy is still far from certain, with the parliamentary voting scheduled this Monday. It is worth remembering that Cyprus ruling government does not enjoy a majority in the chamber, meaning that rejection to ratify the unpopular act of theft may lead to large banks in the country collapsing."

For now, the Euro is barely holding above the $1.29 area, which is an astounding minus 170 pips from its closing level in New York on Friday. As Forexlive editor Eamonn Sheridan note: "Its still very early in Europe, but if they walk in and look at EUR/USD down at 1.29 after the gap lower and no attempt at all to fill it then there’s going to be another attempt hard at the downside. Perhaps we’ll see European authorities with some jawboning to provide some support to EUR. Otherwise it isn’t looking pretty."

The next critical step is to keep both eyes on the Cyprus Parliamentary voting on the agreed Cyprus rescue deal, where the country's politicians must now ratify the new measures. As Valeria Bednarik, chief analyst at FXstreet.com, noes: "If the country does not reach an agreement, it could face the first EU bankruptcy, not just on banks but for the country as a whole."

Greg Gibbs, FX strategist for RBS, notes: "Perhaps the most negative aspect of the Cyprus development is the uncertainty over how long it takes for its parliament to agree on depositor haircuts. The longer it takes the longer the bad taste stays."

Since the Cypriot government controls 28 of 56 seats, and with the risk of members of a junior member of the coalition government threatening a NO vote, "the government is hoping for the support from a small pro-European party" Greg adds.

Greg says that unless the Cyprus government approves the deal, "it may not get a bailout and thus need to exit the EUR..."

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