– EUR vulnerable for now but ultimately a buying opportunity
EURUSD fell below 1.2850 (a four-month low) as the Cypriot parliament rejected the bank deposit levy bill but partially recovered to around 1.2890 after the ECB said it will continue providing liquidity to the banking system “as needed within the existing rules”. We do not believe the move by the Cypriot parliament should be seen as the ultimate “no” vote to the bailout; we expect a new deal to emerge soon. The details remain highly uncertain at this point, although it appears that bank deposits under EUR 100k (i.e. those covered by deposit insurance) will likely not be part of the contribution to the bailout. Some media reports suggested the possibility of a larger involvement by Russia which holds a substantial share of the non-resident bank accounts (perhaps of around EUR 20bn), including the options around gas field exploration rights. The government and ECB officials are now working on capital control plans to mitigate any bank run. Sources note that contingency plans could include limit on daily bank transactions when banks are re-open next Tuesday and with control borders checks for cash over a certain amount. The failure to ultimately pass a deal would clearly lead to the very negative scenarios, possibly involving the question of Eurozone membership. However, we believe it is unlikely that the ECB will pull the plug on the Cypriot banks as highlighted by yesterday’s statement. Signs of broader market contagion have been more noticeable on yesterday, albeit the extent of the moves was not large with US equities down by around 0.3%. In the nearterm, we see more EUR downside risks, but we believe that ultimately the move will be seen as a buying opportunity. Our technical analyst suggests that key support for EURUSD is from the October 2012 low of 1.2806.
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BNP Paribas