– EURUSD rebound above 1.300 on Cyprus’ deal; stay long EURCHF
Cyprus headlines remain in focus. EUR rallied above 1.300, just shy of 1.0350, following morning headlines that “Cyprus and Troika reached an agreement in principle”. The removal of Cypriot’s parliament vote on the bailout should also remove some uncertainties. This paves the way for the first tranche of up to EUR 10bn of bailout funds in early May after all formalities are completed in April. In the Eurogroup statement, the following terms were agreed and welcomed by the EU: (a) all insured depositors (deposits < EUR 100k) in all banks will be fully protected; (b) Laiki bank will be resolved immediately – with full contribution of equity shareholders, bond holder and uninsured depositors (>EUR 100k). EUR 4.2bn is expected to be raised from the resolution of uninsured deposits; (c) Laiki bank will be split into a “good bank” and a “bad bank” – “bad bank” will be run down over time while the “good bank” will be absorbed by Bank of Cyprus (BoC). BoC will assume EUR 9bn of the ELA and ECB will continue to provide liquidity to BoC; (d) only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and could then be written down in value. BoC will be recapitalised through a deposit/ equity swap of uninsured deposits to meet 9% capital ratio; (d) the bailout fund will not be used to recapitalise Laiki and Bank of Cyprus. Elsewhere in Eurozone, Italian politics will also be in focus in the coming days. As expected, the Italian President Napolitano has given the task of forming a new government to the leader of the center-left Pierluigi Bersani. Negotiations will be difficult. Our European economists suggest that the most likely and the least unstable scenario is a grand-coalition between Bersani and Berlusconi. Should no government be formed in the coming days (most likely by Tuesday), the President may opt for a more neutral political figure. Still, we do not expect broader market contagion evident from the Italian and Spanish bond yields fully reversing their initial rise. With EURUSD cheap relative to our valuation metrics (see chart) while market positioning long USD, our bias remains to buy on pullbacks. Our medium-term view remains intact – we see EURUSD gaining to 1.3500 by the middle
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BNP Paribas