– EUR vulnerable as options for Cyprus are discussed; weakness ultimately a buying opportunity
EURUSD has sustained a rebound off Tuesday’s four-month low of 1.2850 after the Cypriot parliament voted “No” to the proposed bailout plan. The immediate risks to markets have been contained by the ECB continuing to provide liquidity to the banking system “as needed within the existing rules”, with banks remaining closed until at Thursday and with talks of capital controls put in place once the banks do re-open. We do not believe that the move by the Cypriot parliament should be seen as the ultimate “no” vote to the bailout and there are three options going forward as BNP Paribas economists highlight in their note “Cyprus: ‘No’ Vote”. The three option are: 1) for eurozone countries to back down from Cyprus’ contribution to the bail out plan; 2) for Cyprus to find an alternative source of funding, including support from the Russian entities, or 3) for Cyprus to leave the EMU. Uncertainty is likely to remain high as other eurozone countries are unlikely to want to contribute further to the bail out for Cyprus and further loans would push the debt-to-GDP ratio to an unsustainable 180%. Given the high cost of an EMU exit, option 2 appears the most likely solution. However, reaching an agreement is likely to take time. In markets, signs of broader market contagion have been more noticeable since Tuesday with Italian and Spainish bond yields moving higher. In the near-term, we see more EUR downside risks, but we believe that ultimately the move will be seen as a buying opportunity rather than the next major stage of the debt crisis. Our technical analyst suggests that key support for EURUSD is from the October 2012 low of 1.2806.
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BNP Paribas