Cyprus bailout brings European debt crisis back on the radar screen

EUR

The trading week started with a proper panic reaction in the beginning of the Asian session on Sunday evening after news emerged, that the euro zone finance ministers and the International Monetary Fund had agreed to a €10 billion bailout package for Cyprus which included a "haircut" for retail bank depositors.

Cyprus is the fifth euro zone member to be bailed out. Because of the size of the country which has less than 1 million inhabitants and a slender 0.2% of the euro zone's GDP the bailout would not be noteworthy if it was not for the fact, that it is the first time that depositors would contribute to a bailout.

The market reacted with fear; EUR/USD opened 160 pips lower to trade below 1.29 after closing at 1.3070 the Friday before. Even USD/JPY opened with a huge gap lower, quite a rare event in currency markets.

The whole week was characterized by uncertainty and speculation about what is going to happen after the Cypriot parliament then rejected the bailout package on Tuesday evening. EUR/USD did stage some recovery attempts but was not able to regain the 1.30 handle until Friday afternoon, among speculation, that another deal would be agreed upon over the weekend.

The fact that the Ifo business climate index in Germany fell versus the consensus expectations did not have any lasting impact on the euro as the market was totally focused on the Cyprus story. On late Sunday evening than an agreement was found which would leave deposits below 100K unaffected but would tax amounts above that level to a larger extent.

This sent the EUR/USD to a high at 1.3048 at the beginning of this week but the gains quickly faltered because the deal failed to eliminate fears for a bank run in the peripheral states of the union.

USD

The US dollar gained against the euro but lost against the pound last week.  On Wednesday the US central bank left interest rates unchanged at 0.25% as expected. Fed Chairman Ben Bernanke's statement after the FOMC meeting Wednesday did not have any major impact on the market.

The president of the US Federal Reserve did not give any hint when and how exactly he plans to end the latest stimulus program. That was good news for the stock market which trades near record highs but the dollar did not react at all to the statement. The US dollar Index stabilized just underneath the 83 level after the strong rally seen since the beginning of February.

GBP

The world's oldest currency was one of the weakest among the major currencies in 2013 so far, against the US dollar it was down as much as 1300 pips since the beginning of the year. Contrary to the trend of the last few weeks the British pound gained 0.76% last week against the US dollar to trade at a 1-month high and 1.42% against the euro, supported by the fact, that the BoE is keeping the Asset Purchase Program unchanged at £375B.

The pound also found support strengthened by safe haven flows of investors who were looking for an alternative for their funds in light of the situation in Cyprus. We see strong horizontal resistance in the weekly chart of GBP/USD in the 1.5270 area and therefore expect the short term recovery to stall at that level.

Yen

The Japanese yen gained after the first official press conference of the new BoJ governor. Haruhiko Kuroda did not provide any new information regarding further monetary easing in order to evaluate the yen and the market reacted with disappointment. Forex investors will now wait for the next interest rate announcement on April 4th.

USD/JPY retreated to a low for the week just above the 94 level. A look at the chart reveals a consolidation pattern after the strong rise since November 2012. As long as the 94 yen level holds on a closing basis further gains towards 97 are likely.

CHF

The Swiss Franc was profiting as well from last week's events. If the European policy makers fail to calm the markets in the upcoming days another attempt to test the SNB floor at 1.20 might be ahead for EUR/CHF.

NZD

The New Zealand dollar rallied last week after better than expected fundamental data. The fourth quarter GDP reading of 1.5% was way better than the consensus estimate of 0.9%. The Kiwi dollar broke above the key down-trend line since mid-February and gained more than 150 pips to close the week near the 0.8350 level.

Gold

The shiny metal profited from the uncertainty regarding Cyprus and gained roughly 15$ per ounce last Monday. But we did not see any follow-through buying in the metal as it was not able to surpass short term key resistance at 1620 $/ ounce.

As long as this level is not taken on a closing basis Gold remains fragile from a technical perspective. An another test of the 1550$ level seems likely.