FX Markets were more positive into the close of the week with hopes that there would be a Cyprus deal over the weekend but as markets awaken in Asia this morning so far all we know is that the President of Cyprus has jumped on a plane and is headed for Brussels – no doubt to tug his forelock, and prostrate himself in front of the great sages of the Euro project.
Ok so I’ve already gone off into rhetoric but is almost impossible to understand how the Euro Project is going of the rails for what is a tiny amount of money by European GDP standards. We have heard from many that Cyprus is just 0.2% of the EU’s GDP while Greece is 2% as the reason behind the differing treatment of the two nations. We also know it is unpalatable for Germany and no doubt Finland to be bailing out Russian Oligarchs and money launders but the knock on effects of potentially bailing in Guaranteed depositors and by imposing capital controls within the EU seem not worth the angst that could be avoided by helping out the cypriots.
We agree the Cypriot offshore banking model should never have been allowed to grow inside the EU – but the same team that is punishing Cyprus now let it happen or at least let Cyprus into the Zone knowing what they were up to.
Anyway we don’t yet know how this is going to end but new €100 per day limits on ATM’s suggest the capital controls are likely so as we wrote over the weekend to us the EUro project is now terminal. Sure a lot rests on the fact that once in the monetary union exit is not an option but capital controls are just exit by another name. We think the EU should cut the cancer to try to save the project and let Cyprus go the way of Iceland. Of course who knows where that will end but if there is no appetite to save the little island then half measures risk reigniting fears put to bed mid 2012 by Mario Draghi’s intervention.
So to the markets.
Stocks in the US closed on a better note in what was a data free day’s trade. The Dow closed up 91 points or 0.63%, the Nasdaq rose 0.70% and the S&P 500 was up 11 points or 0.72% to 1,557.
In Europe it was more mixed with the FTSE up slightly for a gain of 0.07%. The DAX however was knocked by the weaker than expected German IFO business survey which fell to 106.7 against 107.4 last and the expected rise to 107.6. Current assessment and expectations were also lower. Milanese stocks rose 0.69% while the CAC fell 0.13% and Spanish stocks dropped 0.25%.
The FTSE is at a really interesting level on the charts worth watching. Friday’s low was the third touch on a trend line that goes back to the lows late last year. This is a good sign but equally worth watching as our set up suggests it is going lower.
In FX markets the Euro rallied as you can see in the Chart below and it has moved away from the 200 day moving average again but as yet has not taken out our fast moving average. The chances are building however and while we believe this Cyprus mess means Euro goes substantially lower in time more aggressive traders who think that there will be some sort of positive resolution in the Euro’s favour could use the 200 day moving average as the stop on any longs. Euro is sitting at 1.2957 this morning with the 200 day moving average at 1.2864. If this level gives way it is 1.2650 here we come.
The Aussie continues to benefit from the obvious message that Cyprus is sending to get your money out of bank deposits in the crisis hit EU nations – indeed abstract Germany and Finland deposits are probably no longer “safe” in the sense of haircuts at some point in the future in any continental European jurisdiction in the longer term. So money will flow to safe harbours like the Aussie.
Looking at the 4 hour chart the outlook for the day is fairly clear. A break of the high from last week at 1.0457 should see the Aussie kick toward resistance in the 1.0512/32 zone and the 4 hour uptrend bottom from the lows around 1.01 comes in at 1.0392. Unless something catastrophic happens and risk goes off undermining even the safe harbour attraction of the Aussie this is likely to find solid support.
USDJPY is also looking interesting on the charts. The uptrend line from the start of the rally comes in 93.98 which is also around the level of our slow moving average – a break of this level would open a much deeper retracement and it is worth noting the outlook for the Nikkei with 12184 the key level to watch on the downside in MT4 terms.
On Commodity markets Gold is losing momentum from its rally and although we have been short term bullish our indicators are suggesting that last week’s high around the $1,616/17 region and just below our target of $1619 might be it for now. We’ll have to see how things pan out but only a break of the highs, which our indicators still suggest is more likely than not, would open up further topside.
Elsewhere on commodity markets Nymex crude rallied 1.36% to $93.80 Bbl, gold was 0.47% lower the more volatile precious, Silver, fell 1.76% to $28.65 and copper was up a little less than 1%. On the Ags corn fell 0.91%, wheat rose 0.14% and soybeans fell 0.59%.
Cyprus is the key over the next day or so so watch that closely – might be a time for small positions.
Economic data wise the Chicago and Dallas Fed manufacturing indices are out and Ben Bernanke is talking.