So far
Pair was trading around 1.3050 prior to weekend announcement of depositor haircut. Gapped 130 pips down Monday and touched almost 1.2875. Started rebounding at London open towards 1.2975. Hit almost 1.3000 at London close. Consolidated back to 1.2950 at US close and quoting there currently.
Cyprus
Cypriot parliamentary vote on bail-in postponed Tuesday indefinitely. Banks tenatively set to re-open Thursday, so ostensibly this makes Wednesday seem like the deadline. It is unclear if the government has enough support to pass this. Shifting the burden mainly onto 100K+ and 500K+ depositors would alleviate some of the mass outcry against it, and may allow enough parliamentary support for passage. Bail-in outcome:
- Passed
- Cyprus EZ exit avoided
- Precedent set for peripheral bank capital flight - WATCH SOVEREIGN YIELDS for an indication of this over the longer term
- Buy Euro short term, but assess capital flight
- Not Passed
- Cyprus banking system collapse
- Cyprus EZ exit, redenomination to Lira.
- Sell EUR to at least 1.2650 and re-assess.
Action: I can see the pair testing the bottom again around 1.2875 on Tuesday, but I can't see any catalyst for it breaking thru. Sell rallies up to around half of the weekly gap, say 1.3025. Cover close to the short term bottom at 1.2875, keep a little on to see if it breaks beneath, pending the news out of Cyprus. Cover most prior to the Fed's 2:30 EST monetary policy release.
Fed
Since the timing of the Fed's monetary policy release is set to closely follow action in Cyprus, watch for a reversal on dovish tone. I personally expect the same language from the Fed about assessing risks of QE, blah blah blah, but the reality is that Benny and the FOMC NY open market desk are not going to be selling anytime soon. How could they POSSIBLY sell treasuries/mortgage backed securities into the market right now and expect real buyers? Sorry, but it's a complete fcking joke. And forget selling, I can't even see the current buying binge coming to an end in 2013.
Last Thursday, it looked like the market was starting to unwind its long dollar index trades after the US CPI came in over expectations and there was no trend continuation. The unwinding appeared to be continuing into Friday. And then the EZ/Cyprus situation happened, so it's hard to get a feel for real positioning.
Action: I'm favoring getting out of my EUR shorts prior to the FOMC announcement and getting long another currency like CAD or possibly even MXN. CAD appears to be slightly oversold at this point and would seemingly benefit from dovish tone.
