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Fundamental Afternoon Wrap: No escaping the Cypriot storm

FXstreet.com (Barcelona) - This afternoon´s institutional research has stuck with the Cypriot theme due to the overwhelming liquidity of the situation. Is the vote on or off? Is the foreign minister on his way to Moscow? Has the levy been amended? Big questions are being asked but for now, the answers are unknown.


Michaela Moran of BAML believs that any damage from the Cypriot crisis should be contained in the short run. She feels that the ECB´s possible course of action to limit the fallout from the crisis in Cyprus and avoid financial market disruption that could derail the fragile and nascent Eurozone recovery. She adds that although short-term damage may be limited if an agreement on Cyprus can be reached quickly, longer-term damage could be more significant reflecting the lack of strategy of the Eurozone when it comes to restructuring. She writes, “In addition, the Cyprus deal shows once again the Eurozone's reluctance to adopt a common stance on legacy assets or expedite the completion of EU institutions. Hence, the ECB has tools to avoid severe financial market disruption, but not to solve the underlying problems.”

Brown Brothers Harriman analysts note that Cyprus remains at the front of analyst focus today with the situation remaining extremely fluid to say the least. They see that the newly elected president seemed to be among the strongest advocates of taxing small depositors. Elsewhere, they note that many are noting that a taboo has been broken and a Rubicon has been crossed, but they are not so convinced.

Jane Foley of Rabobank notes that there is yet to be any significant progress made in the Cypriot situation, but she notes reports that the Cypriot Finance Minister could be travelling to Russia to negotiate a change in terms to Russia’s existing EUR2.5 bln loan to the island, which she feels underscores the importance of this angle to Cyprus’ situation. She writes, “In view of the large financial links between the countries, Russia is unlikely to welcome a 15% levy on deposits over EUR100K.”

Sebastien Galy of SocGen writes, somewhat poetically, “Legionnaires train around a pit in Djibouti passing a live grenade in a circle around a pit before throwing the grenade in. Welcome to Europe’s negotiation style: last minute, fairly dramatic and works somehow in the end.” Meanwhile, the analysts at TD Securities note that the Cyprus bailout debate continues to dominate market attention this morning and the ‘risky’ FX majors are all on the defensive against broadly stronger safe-haven currencies—the USD, CHF, JPY (and the GBP for now). They write, ”The ‘risk off’ mood is pervasive across markets as well with lower equities and commodities, and a persistent bid for Bunds and Treasuries.”

Forex: USD/CHF still pressured during US trade

The area at 0.9430 has been holding the USD/CHF against further downside successfully, but the market is insisting is keeping the pair subdued at that area, below the opening price of 0.9460 and the daily high at 0.9480.
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Forex Flash: Europe unlikely to unravel on Cyprus – Deutsche Bank

The Cyprus situation still stands in systemic terms – a slow burner of an issue more than an immediate macro shock but not one to be under-estimated in importance medium-term. According to Macro Strategy Analysts J. Reid and C. Tan at Deutsche Bank, “For now assuming the proposal gets passed (the votes are seemingly not yet there) and even better watered down with small depositors bearing less or even none of the levy, Europe will likely only see small short-term collateral damage.”
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