Cyprus uncertainty weighs
on the market
The weekend headlines out of Cyprus have given the
market plenty to consider after what has been an increasingly troublesome few
weeks for the single currency. The issue of a Cyprus’ bailout needs is not a
new one but what took the markets by surprise is the fact that the plan
includes proposals for savings in Cypriot bank accounts to be taxed by as much
as 9.9%. Equities knee-jerked lower and the euro also came under pressure,
while tensions have understandably increased in the bond markets.
A parliamentary vote on the proposals has been delayed
until today at 16:00 GMT. We are likely to see the tax proposals – 6.75% on
deposits up to €100k and 9.9% on €100k and above – diluted to a significant
degree, with greater emphasis on safeguarding less wealthy depositors. The
latest reports suggest deposits up to €20k will be untouched. Whether or not
Cypriot MPs will vote in favour of whatever plan emerges is highly uncertain,
given President Anastasiades does not enjoy the luxury of a parliamentary
majority.
The ECB has been quick to reassure us that Cyprus
represents a special case and this does not mean, for instance, Italian and
Spanish depositors face similar taxations risks. For those with the luxury of
being able to safeguard themselves by parking their funds elsewhere – in a
German account, for example- capital flight would seem an intelligent option.
However, a widespread bank-run in larger nations would not be our central
scenario.
As usual there are more questions than answers but the
one thing you can take away from developments in Cyprus, that confidence in the
euro and more specifically the banking union will have been undermined.
Good
chance of another MPC vote in favour of QE
We know that Mervyn King failed to convince the two
extra voters he needed for a pro-QE decision at the MPC’s monthly meeting a
fortnight ago. However, what we don’t know is whether he managed to take the
vote to a 5-4 split. We expect Wednesday’s MPC meeting minutes to reveal that he
did, with Paul Fisher looking the most likely candidate to have drifted into
the dovish camp. If this is true and the MPC has edged that little bit closer
towards QE, then expect sterling to come under some pressure. Today’s UK
inflation figure came in higher at 2.8% but we doubt this will deter the MPC
from topping up its QE operations.
George Osborne’s Annual Budget announcement could also
take the wind out of sterling’s sails tomorrow. Growth expectations are likely
to be downgraded and based on his track record, you would have to be
pessimistic on the probability of the Chancellor announcing the convincing
growth-boosting measures that the UK economy is crying out for. The Budget will
likely serve as an unwelcome reminder of the awful state of UK growth and
sterling may struggle as a result.
End of week forecast
|
GBP /
EUR
|
1.16
|
|
GBP /
USD
|
1.4950
|
|
EUR /
USD
|
1.29
|
|
GBP /
AUD
|
1.4450
|
|
|
|
The pound has been given a helping hand against the
euro, reaching a five-week high of €1.17, though it trades a quarter of a cent
lower than this now. We suspect this pair will give back some of this latest
rally with the MPC minutes and Annual Budget in mind, though this pair’s lows
around €1.1350 look safe for the time being. Much depends on headlines out of Cyprus
in the very short-term. Against the US dollar, sterling is in slightly better
shape up at $1.51. However, we remain sceptical as to the scope for further
sterling gains, given the lack of any real sterling-positive news.
Richard Driver
Currency Analyst
Caxton FX
