What will be the market impact from the Cyprus bailout?
Citi FX guru Steven Englander explains what to watch in the currency space.
The developments in Cyprus will lead to EUR selling and USD, CHF, GBP, NOK and SEK buying (in that order). The issue is whether to believe that the Cyprus levy on depositors is one-off, but depositors and investors elsewhere could easily see this as another in a string of ‘one-offs’ and react badly. The risk-return to depositors in countries with weak banking systems may not favour taking the risk that Cypriot banking system was so unique that such a levy would never be considered elsewhere. The levy on deposits ostensibly covered by deposit insurance may also undermine confidence in weak banks.
The question is whether this becomes a full-blown crisis or a mini-crisis. Given the element of surprise, it is probably the case that euro zone policymakers will not have concrete measures prepared to convince depositors elsewhere that this will never happen again. So it seems likely in the first instance some resurgence of tail risk will re-appear and that there is a risk that we could see a downward spike in the euro and significant backing up of spreads.
The reaction of The Swiss Franc (CHF) will be particularly interesting. When Europeans panic, they rush into Swiss assets and Swiss banks, as a safe haven in the middle of their own continent. During the worst of the euro crisis, the Swiss Franc soared against the euro.
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