Back
22 Mar 2013
Forex Flash: Cyprus in the mix - Nomura
FXstreet.com (Barcelona) - Nomura strategists Jens Nordvig, Saeed Amen and Matthew Slade note that the market´s attention turned to Cyprus this week.
Additionally, there was the FOMC meeting with policy remaining unchanged, the UK budget saw minor changes to the BoE´s remit, and Kuroda´s maiden speech, as USD was mixed among the G10, but stronger against much of EM while equities slumped. They note that Cypriot news this week has been bad, with the prospect of depositor haircuts not expected and poorly received and the initial vote was rejected on Monday in the Cypriot parliament. They write, “While this does not totally close the door on some sort of deal, it does add to the uncertainly. In the longer term, the news from Cyprus does raise question marks about the improving trend in Eurozone banking flows observed since August 2012. The haircutting of all deposits is a radical step and puts into question the notion of deposit insurance schemes broadly. Predicting deposit flows is inherently difficult, and deposit dynamics have generally
proved more stable than expected in the Eurozone in recent years.”
Nevertheless they note that it is the first example of deposit haircuts during the Euro crisis and could make other peripheral depositors nervous, despite the numerous assurances by policymakers that Cyprus is a special case. They sold EUR/USD through options and exited our EUR/CHF spot exposure. Elsewhere, they also looked at the trends in Japanese investment amid expectations on the “new BoJ”. They write, “Japanese portfolio investment has not contributed much to JPY weakness so far. The likely rise in lifers and banks‟ foreign bond investment after the BOJ‟s aggressive JGB purchases will only likely be marginally positive for USD/JPY. Improving risk appetite among investors (including retail) will be more important, as it enables them to take more FX risks.” They are expecting more aggressive foreign investment by retail and after considering a deteriorating trade balance and elevated FDI outflows, they judge that Japanese orientated flows continue to point to gradual JPY weakness.
Additionally, there was the FOMC meeting with policy remaining unchanged, the UK budget saw minor changes to the BoE´s remit, and Kuroda´s maiden speech, as USD was mixed among the G10, but stronger against much of EM while equities slumped. They note that Cypriot news this week has been bad, with the prospect of depositor haircuts not expected and poorly received and the initial vote was rejected on Monday in the Cypriot parliament. They write, “While this does not totally close the door on some sort of deal, it does add to the uncertainly. In the longer term, the news from Cyprus does raise question marks about the improving trend in Eurozone banking flows observed since August 2012. The haircutting of all deposits is a radical step and puts into question the notion of deposit insurance schemes broadly. Predicting deposit flows is inherently difficult, and deposit dynamics have generally
proved more stable than expected in the Eurozone in recent years.”
Nevertheless they note that it is the first example of deposit haircuts during the Euro crisis and could make other peripheral depositors nervous, despite the numerous assurances by policymakers that Cyprus is a special case. They sold EUR/USD through options and exited our EUR/CHF spot exposure. Elsewhere, they also looked at the trends in Japanese investment amid expectations on the “new BoJ”. They write, “Japanese portfolio investment has not contributed much to JPY weakness so far. The likely rise in lifers and banks‟ foreign bond investment after the BOJ‟s aggressive JGB purchases will only likely be marginally positive for USD/JPY. Improving risk appetite among investors (including retail) will be more important, as it enables them to take more FX risks.” They are expecting more aggressive foreign investment by retail and after considering a deteriorating trade balance and elevated FDI outflows, they judge that Japanese orientated flows continue to point to gradual JPY weakness.