Global markets left uninspired by Cyprus deal

Global markets found little to rejoice about overnight despite an eleventh hour deal between Cyprus and European negotiators over the terms of their bailout. Under the deal, depositors with EUR100,000 or more will clipped by as much as 30 percent, with some news agencies reporting potentially more wiped from the bottom line of large depositors, for the most part hitting the hip pocket of Russian nationals.

Laiki Bank, Cyprus’ second largest bank will be closed and funds below the 100,000 threshold transferred to the Bank of Cyprus. The only remotely positive part of the deal is smaller depositors will be excluded from the tax, but it’s abundantly clear Cyprus’s ‘bail-in’ sets a dangerous precedent by undermining the most important attribute a Bank can hold, trust. How this will affect the broader Euro-region remains to be seen, but it may take a lifetime to restore the trust in the Cypriot banking system. As banks re-open their doors we can expect a flurry of withdrawals; in turn the government is likely to ramp up capital controls to stem the outflows of capital from the region, reminiscent of the Argentina crisis of 2001. On a larger scale, the deal undermines faith in fiat currency given the risk of a similar style bailout for the broader Euro-region.

An immediate bounce from the Euro was short-lived, with the EUR-USD making a break to the downside of the 200DMA to lows of $US1.2829. Similarly the Euro took a hit across the board with safe-haven flows making their way back to the Yen, with the Aussie and Kiwi also receiving residual support from Euro outflows. The EUR-AUD pair continued its downward trajectory with the pair forging a 4-month low in recent minutes of 1.2272.

It would appear the disruption in the Euro region helped rather than hindered risk currencies such as the Australian dollar, which held its ground above 104-figure, hitting a 2-month high against the greenback. While there were moments of weakness, the Aussie’s credentials as a currency attached to a fundamentally sound economy increased its appeal.

With no economic data on the local docket, traders will focusing on RBA governor Glenn Stevens address at the ASIC forum in Sydney, alongside broader equity moves. Given the stronger data pulse locally, one would expect Stevens will maintain a positive tone, but any optimism on local themes may be guarded given renewed turmoil in the Euro region.

At the time of writing the Australian dollar is buying 104.6 US cents. We anticipate the local unit will range between 104.4 and 104.8 during the domestic session.