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March 17th, 2013 at 8:39 am

A Different Kind of Bailout.

Cyprus has become the next member of the EU to receive a financial aid package or a bailout. Compared to previous efforts, the sum involved here is relatively modest, only EUR 10 billion. At the same time, conditions are also different. In order to receive the funds, Cyprus agreed to tax account holders in the banks at 9.9% on deposits over EUR 100,000 and 6.75% on smaller amounts. This move is expected to bring about EUR 6 billion, paving the way for more money from the EU and the IMF. The tax still could be avoided, if Cyprus’s parliament does not approve it on Monday. However, that will likely void the new agreement with the EU, leading to more negotiations.

It is the first time during this European crisis that depositors, not bondholders, are forced to contribute to a bailout and it sets a dangerous precedent. In spite of denials by officials in Brussels, this could become a part of all future bailouts. In case Spain and Italy need aid in the future (very likely), it will be very difficult to justify lack of similar action and avoid yet another friction among the member states. It will be interesting to see how currencies react to the news, chances are high that the Euro will be volatile in early trading.

While on the subject of the common currency, perhaps it is time to discuss the EUR-GBP. It has been a long time since I covered this pair on these pages. Currently, its intermediate term chart reveals a consolidation, following a strong rally. It is difficult to say if the present situation is simply a slowdown within the prevailing uptrend or a possible top. One way to find out is to watch the significant support at 0.8575. If it is broken, the EUR-GBP could drop much lower. I have a sell order at 0.8571, looking for 100 pips if this happens.

Another currency pair of interest is the AUD-CHF. Here I am looking at the 1H chart, which is showing a possible trend reversal. The price has just dipped under the 100 SMA, forming a low at 0.9735. Should it continue lower, I want to get in at 0.9731, targeting 100 pips. Both of these trades can take some time to develop, probably not an overnight proposition.

In addition, early volatility in shape of opening gaps is always a possibility, especially on the account of news regarding the Euro. That could lead to good trading opportunities. I am still looking for trades shorting the Yen pairs, using all time frames and crosses. Have a great trading week!

Mike K.

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