Cyprus deal likely to drive the Euro


The coming week, the Euro’s direction is most likely to be determined by the prevailing banking crisis in Cyprus. With failed Plan A that included a bank levy tax on all depositors which was overthrown by 36 votes with no votes supporting the proposal and Plan B fizzling out, with no deal being reached with Russia, Cyprus looks to be all set to come up with Plan C.

Latest news reports indicate that Cyprus is close to reaching a resolution which involves agreeing for a bank levy tax on deposits of 100,00 and above.

The ongoing stalemate urged the ECB to warn Cyprus about cutting off liquidity to the island this Monday, putting more pressure on Cyprus Parliament to reach a concensus.

While until now Cyprus was unanimous in its stand against the terms imposed by the Troika, at times threatening to leave the Eurozone, it is evident that leaving the Eurozone would set back the island and also damage its financial reputation in the long haul, not to forget having to take a currency devaluation and the risk of capital flight should the island revert to its Cypriot pound. Ratings agency Standard and Poors has already put the island on CCC rating and on negative watch.

Although a Cyprus exit from the Eurozone is unlikely to happen, the island has already imposed capital controls late Friday with more meetings planned over the weekend. With the ECB refusing to budge and Russia seeking more flexibility to offer funding to the island along with the deadline of March 25th, this weekend will prove to be quite packed with action for the Euro.

The impasse during last week saw European shares mixed, trading mostly in the red and also the single currency saw a biggest drop in two days. As of Friday, the Euro managed to rise 0.7% but the week ahead will be clearly dictated by the Cyprus banking turmoil.

While it might be bad news for the Euro, the crisis is turning out to be a blessing for Gold. The precious metal is back on the rebound and all set to rise again as investors look to the precious metal against the prevailing global crisis where most country’s central banks do not show any signs of slowing down their quantitative easing.

Looking beyond Cyprus, the week ahead is also packed with key economic data spanning the US, Japan and Europe.

The US Federal Reserve Bank’s decision to continue with their monetary policy has boosted confidence in the financial markets and has helped to balance out the negative sentiment from Europe. On the flipside though, the monetary policy has resulted in the US dollar yields dropping and investors seeking currencies with higher interest rates, weakening the US dollar.

Fed Chairman Bernanke is expected to speak on Monday along with testimonies from other regional Fed chiefs, each of which will be closely watched by investors. The week ahead will also see data on the home sales front being released (S&P/Case Shiller price index) and the Michigan consumer confidence report on Friday.

From Japan, we’ll be hearing about the inflation report on Thursday with the new BoJ Governor Haruhiko Kuroda convening his first monetary policy meeting. A weak inflation reading is likely to push the BoJ governor to announce more easing.