Forex Profits Master: A solution for Cyprus!

The Big Picture

A solution for Cyprus! Not necessarily the best solution possible for Cyprus, but it is a solution that prevents a disorderly collapse of the banking system and will keep the country in the Eurozone. The agreement sent EUR/USD higher at the opening today, but not back to the levels a week ago, before the first bailout plan for Cyprus was announced (and later rejected). The failure to recover that previous level suggests confidence in the Eurozone has been shaken somewhat.

The whole affair has highlighted the difficulties of making decisions in the Eurozone and the impediments to a true single market, for example in banking supervision. As usual, the decision came around midnight on a Sunday (0:40 AM Brussels time), a familiar pattern now. Is that anyway to run an economy? Remember that the discussions over aid to Cyprus had gone on for nine months before reaching a crisis last week, and the problems of the banking sector were never much of an issue for the Eurozone before they suddenly became the big issue. The imposition of capital controls in Cyprus goes against the single market concept; why does a Cyprus-based euro have restrictions that a euro from Germany doesn’t? Such issues are likely to bring Euro risks, which had faded after the ECB last year pledged to back trouble countries’ debt, back to the market’s attention and reduce confidence in the single currency. That’s likely to cause it to weaken over time, in our view.

This is the last week of Q1 and should therefore see some position squaring. In the context of the recent market, that probably means selling dollars, as occurred across the board Monday morning.

The week will be shortened by the Good Friday holiday, which is observed in much of Europe, the US and many other countries. Fed Chairman Bernanke and several of his colleagues, plus RBA Gov. Stevens will be making speeches this week (Bernanke, who speaks at a conference today, is not likely to add much to what he said last week after the FOMC meeting). There are no major central bank meetings scheduled for this week, although there is a chance that the Bank of Japan will hold an emergency policy board meeting under the direction of its new Governor.

Data from the US this week includes durable goods orders, several Fed surveys, personal income and spending, the consumer confidence surveys, and several housing indicators. In Europe, the Eurozone sentiment indices, money and credit growth indices and leading economic indicators will be announced, as will German retail sales, labor statistics and consumer confidence. We expect the data to highlight the growth gap between the US and Europe and to keep EUR/USD capped. Japan has its usual end-of-month data dump, including the labor statistics, consumer price index and industrial production. The Bank of England’s Financial Policy Committee will report on UK bank capital levels.

The Market

EUR/USD

The agreement on Cyprus has brought some measure of stability back to the pair, but the euro has once again gotten a risk premium, which is likely to change its center of gravity so that it tends to drift lower over time.

EUR/USD found resistance at the 23.6% retracement of the down move that has taken place the past seven weeks. Resistance for the day is likely to come within the 1.3050 – 1.3080 area, with trendline resistance a lot lower at 1.2980 and possible support at 1.2940.

USD/JPY

USD/JPY moved down slightly as funds that had moved back into dollars because of the Eurozone risk moved back into risk assets. We await news from the new BoJ Gov. Kuroda, who will be speaking in the Diet tomorrow. It may be hard for him to exceed the market’s already-high expectations.

USD/JPY found trendline support on Friday, before rebounding and thereafter retracing as it seemed that we would head into the weekend without a Cyprus deal. Trendline support for today seems to come at 94.15, but with the Cyprus news revitalizing the “risk-on” sentiment, it is likely we will see the pair gain back towards the 95.8 resistance level.

USD/CHF

The dollar’s losses this morning extended to CHF, which is somewhat odd as CHF would be considered a safe-haven currency from Eurozone worries and could be expected to weaken after the Cyprus settlement. It did fall somewhat vs EUR but not as much as USD, which resulted in a lower USD/CHF. We think the fall in USD/CHF is not reasonable from a fundamental point of view and expect the pair to recover.

Further declines are likely to find support around 0.934, which concentrates the 200 and 50 day MA, which are on the verge of a “golden cross”. However, with good news coming out from Brussels with regard to Cyprus it seems that the CHF will lose its haven appeal, with a move towards 0.944, the 23.6% retracement level of the up move since February seeming more likely.

Gold

Gold was down slightly from Friday morning’s levels as the resolution of Cyprus’ dispute with the EU removed a major risk factor from the market. With US Treasury yields increasing as funds are being allocated back into risky assets, and with equities gaining this morning, it seems that gold’s appeal will decline, we would expect gold to decline further today on a fundamental basis.

Gold may find 38.2% Fibonacci support at $1603.50,, with trendline support coming around $1591. Resistance seems to lie at $1618, the 50% retracement level of the February down move. Stochastics sell signals in the H1, H4 and Daily charts, as well as a likely RSI trendline break, further support the view that the haven asset is due to head lower.

Oil

WTI was up sharply on the resolution of the Cyprus agreement, which took out a major risk factor for the world economy. Brent also gained, but not as much, continuing the relentless close of the Brent/WTI gap.

Support for the day seems to lie at $93.35 with likely to be tested resistance coming around $94.90, near the 61.8% retracement level of the February down move, which also sees the upper Bollinger band and the 50-day MA.