Photo: Peter Kurdulija / Flickr
Markets are starting to open in the western hemisphere, and currencies are going wild to start the week on news of the Cyprus bailout deal, which includes a controversial deposit haircut.
The euro is down 1.1 per cent against the U.S. dollar and off a staggering 2.2 per cent against the yen.
Meanwhile, the yen is also up 1.1 per cent against the dollar.
This could clearly develop into a risk-off move for everyone piling into the short-yen trade.
The EUR/JPY currency pair has tracked risk assets well recently, so this could be a sign that the broader rally in risk can unwind, depending on how much “contagion” the Cyprus deal causes.
As Michael Block of Phoenix Partners Group told Business Insider recently, “When this [Japanese rally] has a blip, a lot of folks long credit (including ones who are long structured products that are short these CDS and indices) are going to feel pain…and guess what?? The same folks are also short yen…long U.S. stocks…you get the picture. CORRELATION WILL BE THE DEATH OF US AGAIN.”
BofA Merrill Lynch’s Steven Lee writes in a note to clients from Hong Kong:
The Wellington Open kicks off both EURUSD (~1.2945) and USDJPY (~94.25) off sharply from NY/Fri closes, amidst uncertainty with the Cypriot Parliament’s vote on a deal reached with the Troika on the deposit levy.
BofAML’s Thanos Vamvakidis notes that the parliamentary vote in Cyprus on Monday afternoon will be critical and, upon approval, the extent of bank deposit withdrawals when banks open on Tuesday.
The bottom-line from Thanos: “The government may not have the votes. As a result, the date of the vote is not known with certainty yet, but the official date is Monday 2pm London time. Banks will remain closed if the vote does not take place by Monday (Monday is an official holiday). A negative vote will be a shock with implications beyond Cyprus.”
Citi analyst Steven Englander said earlier, “The developments in Cyprus will lead to EUR selling and USD, CHF, GBP, NOK and SEK buying (in that order).”
The euro is barely moving against the Swiss franc (CHF), but is off 1.1 per cent against the pound sterling (GBP), 1 per cent against the Norwegian krone, and is actually up 0.1 per cent against the Swedish krona.
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