Trade in the euro has calmed today after yesterday's volatility. The aftermath of the latest Cyprus solution has waned. The calm does not belie the disagreement that exists, and the frustration on both sides. Der Spiegel described the split quite well:
"While many in the north question the willingness of politicians in Rome and Athens to bring about reform, citizens in the south are increasingly furious over the austerity diktats from Berlin, Brussels and Frankfurt."
Perhaps that summarizes the personal frustration, the devastation of those in the South, and the anticipation of more bail outs by the North, but what are the precedents that have been established? Does this mean, as Dutch Finance Minister Dijsselbloem so arrogantly asserted, this will be the model for future bail outs? The large saver funds will be confiscated to rescue insolvent banks. Is it not ironic that the Cyprus banks are insolvent because they were forced, by the troika, to write off the bank's worthless Greek loans.
If the owners of private funds are to be responsible for recapitalizing the weak banks in the EU, why should anyone keep their money in an EU bank? Will money not fly out of Spain, Portugal and Italy too? There are other issues too. From the Telegraph:
"A fundamental principle of monetary union -- that the currency is worth the same, wherever it is held and whoever holds it - has been shattered. Some euros, it would seem, are more equal than others. The possibility of capital controls to prevent deposit flight when the banks reopen only further clouds the picture. Free movement of capital is another basic principle of monetary union which the eurozone seems casually prepared to disregard. This is not a proper currency."
Cyprus banks remain closed today. The lone remaining Bank of Cyprus, which will be the recipient of the small accounts from the failed bank, is scheduled to open on Thursday. But the situation becomes even more opaque as Andreas Artemis, Chairman of the Bank of Cyprus, has resigned. Somehow, I suspect the final chapter is yet to be written in this saga.
Could it be the markets are headed for some end of the quarter window dressing? Many hedge fund managers are paid a bonus based on their quarterly performance. If there are open positions that will remain in portfolios, these positions are "marked to market" at the end of this week's trading. The temptation to enhance the value of existing positions as we approach this week's close is compelling. It would not be surprising to see buying in the S&P 500 and some commodities including the WTI oil contract, where funds are big longs.
The big quarterly moves in the currencies have been the pound (FXB) and the yen (FXY). Against the USD (UUP), both have lost value during the quarter. The pound has fallen from a high of 1.63 to under 1.49, and is currently trading around 1.5150. The last COT report showed speculators were still short almost 92K contracts, the largest short position in last few years. It would not be surprising to see some selling in the pound toward the end of the week. So far, the rally in the pound has been feeble, but we may be inclined to buy late week weakness. The pound may not be perfect, but it will once again be the destination for the euro safe haven buyers.
Tomorrow, the UK will report their Current Account, expected to be a negative £12.45B and the Quarterly GDP, expected to be a negative 0.3%. On Thursday, there will be a U.S. GDP Q/Q Report, which is estimated to be a positive .5%. We thus have some negative data, which might weigh on the pound. On March 29th, parts of the world have a bank holiday to celebrate Good Friday. In Ireland, by law, the pubs are closed.
So the final day of the quarter comes on Good Friday, when many banks are closed and traders might be away. Lightly traded markets can result in exaggerated moves and trading opportunities for those with a plan. It is our intention to closely watch the pound for an opportunity to buy versus the USD or the yen.