Last week, the
Fed kept the monetary policy unchanged, but might reduce quantitative easing 3
(QE3) sometimes this year. In reality, investors are focusing on Cyprus, where
another chapter of the euro zone history is unfolding. EURUS is leaning on key
support lines. A rebound to 1.31/1.32 is possible short term.
Cyprus is on the brink of collapse
In Europe, the small
island nation of Cyprus is under the lens as the local parliament has rejected
a tax on bank deposits to fund part of the rescue plan proposed by the ECB.
Consultations are underway with the Russian government to bail out the
insolvent banking sector. No decision has been taken so far, and the troika
(ECB, EC, and IMF) is expected to mediate the bailout. The island’s financial
institutions will remain at risk until a solution is negotiated. Next week, the Cypriot parliament will probably be
obliged to ask larger deposit owners to fund part of the bailout. Otherwise,
the ECB will retrieve any help for the banks, and Cyprus will face an economic meltdown
with a possible withdrawal from the euro zone.
The Euro Group’s
decision to ask for a bailout contribution by taxing deposits should remain an
isolated case within the euro zone, and a breakdown of the Cypriot banking
system should have only limited effects on the global markets. However, a tax on deposits would create a precedent
that would undermine confidence in the safety of European financial
institutions. In the future, European citizens will retrieve their money much
faster in the face of a financial crisis. In addition, the EU, and Germany, in
particular, can be blamed for failures in the peripheral countries, making it quite
impossible for the creation of a more centralized European Union.
The Federal Reserve keeps monetary policy unchanged
for now
In the US, the
Federal Reserve is happy about the improvements in the job market and expects
progress to continue. During last week’s meeting, Chairman Bernanke confirmed that
current monetary policy will remain in place until the unemployment rate falls
below 6.5% or inflationary trends rise above 2.5%. Nonetheless, a decrease of
QE3 is possible this year if the unemployment rate continues to decline at a
steady peace. In the meantime, Congress has passed a resolution to keep federal
offices open until the end of the actual fiscal year. The next appointment will
be May 19th. At that time, the federal debt ceiling, which was suspended
in January 2013, will be reintegrated. Congress now has about two months to
choose a new debt ceiling. Otherwise, the previous limit will be automatically
reinstated.
The US dollar should stay supported for the short-term,
and the US dollar index could rise to 84.00/85.00. Nonetheless, according to
the latest Commitment of Traders report, futures funds have already bought
about 60,000 contracts, which represents a near record high. As a result, any
dollar increase should be limited in time. In effect, seasonally, the US dollar
tends to be strong during the first six months of the year and then declines
toward year-end. The EUR/USD could rebound to 1.31/1.32 in the short/term. The
market is leaning on various support lines, and there is a strong divergence
between the current price and the RSI indicator. A dramatic development in Cyprus
will instead take the European currency to 1.26.
The data contained herein is believed to be drawn
from reliable sources but cannot be guaranteed, neither the information
presented nor any opinion expressed constitute a solicitation of the purchase
or sale of any forex, futures or commodity product. Those individuals acting on
this information are responsible for their own actions. Forex, futures and
commodity trading may not be suitable for all recipients of this report. The
risk of loss in trading forex, futures and options can be substantial. Each
investor must consider whether this is a suitable investment. All
recommendations are subject to change at any time. Past performance is not a
guarantee of future results.
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