– EUR rebound muted on mixed comments that ‘Cyprus is a special case’
The EUR remains underpressure on the market’s uneasiness about the implications of the Cypriot deal following Monday’s comments from the Dutch Finance minister and Eurogroup Chairman Jeroen Dijsselbloem that the Cyprus bank restructuring should serve as a template for the euro zone banks. However, we recommend caution on short EUR trades as these comments were partly retracted and ECB’s Nowotny reiterated on Tuesday that Cyprus is a ‘special case’. Peripheral bond yields are resuming their downward trend on Tuesday following a move higher on Monday and our GDP-weighted measure of EZ spread indicates that EURUSD should be trading higher around 1.33. Over the days ahead the market will be focused on European leaders need to address contagion as banks are due to open in Cyprus on Thursday with capital controls in place. Italian politics are also likely to remain in focus as Peirluigi Bersani’s chances of forming a government in the coming days appear slim and rumours of a possible Italian credit rating downgrade have been weighing on the EUR. Ultimately we do not believe that the fallout from Cyprus and Italy is likely to spread to a renewed debt crisis as long as the ECB remains credibly committed to backstopping the euro zone financial markets. We see an initial level of support for EURUSD around 1.2800 (see chart). Eurozone bond yield spreads indicate that the EUR should be trading higher and BNP Paribas STEER – our short-term fair-value model – indicates that the EUR remains oversold with a fair-value of 1.3185.
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BNP Paribas