Monday, 18 March 2013

Euro Falls Most in 14 Months as Cyprus Turmoil Adds Debt Concern

By Joseph Ciolli & Anchalee Worrachate - Mar 18, 2013 8:30 PM GMT+0400
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The euro slid the most in 14 months against the dollar after a proposed levy on bank deposits in Cyprus threatened to worsen the European debt crisis.
Europe Risks Debt-Crisis Contagion From Cyprus Deposit Levy
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said on Twitter that the concern in Cyprus “moves risk-on trade to backseat.” He added: “Sell euro as well.” Photographer: Kiyoshi Ota/Bloomberg
March 18 (Bloomberg) -- Michael McCarthy, chief market strategist at CMC Markets in Sydney, talks about Cypriot President Nicos Anastasiades's plan to impose losses on the island-nation’s depositors, and its implications for global financial markets and his investment strategy. McCarthy speaks with Susan Li and John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)
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The 17-nation currency fell to a two-week low versus the yen as the nation postponed a vote on meeting demands by regional finance ministers to raise 5.8 billion euros ($7.5 billion) by imposing losses on its depositors. The euro pared its drop as declines in Italian and Spanish government bonds were limited. The New Zealand dollar and Mexican peso weakened as investors sold higher-yielding currencies.
“The biggest fear right now is that there could be a domino effect, which is pushing the euro down,” Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine & Co. in New York, said in a telephone interview. “What the market doesn’t understand is that people who take out money may still put it elsewhere in the euro zone, so I would argue that it’s not euro-negative.”
The euro slid 0.7 percent to $1.2983 at 12:25 p.m. in New York, after dropping as much as 1.5 percent, the biggest decline since Jan. 13, 2012. The common currency slumped 0.9 percent to 123.41 yen after falling to 121.15, the weakest level since March 5. Japan’s currency gained 0.2 percent to 95.05 per dollar.

Trading Fluctuations

One-week implied volatility on the euro-dollar exchange raterose 34 percent, the biggest single-day increase since May 2010. The gauge climbed to 11.23 percent before trading at 10.22 percent.
The premium for one-month options granting the right to sell the euro against the dollar relative to those allowing for purchases increased to 1.18 percentage points from 0.96 on March 15, the 25-delta risk reversal shows.
The shared currency bounced off a critical support zone from $1.2865 to $1.2890, which includes the 200-day moving average, Cilline Bain, a London-based technical analyst at Credit Suisse Group AG, wrote today in a note to clients. The euro may increase to $1.3319, which would be its strongest level since Feb. 25, he said.
Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the currency bloc since the European Central Bank’s pledge in September to backstop troubled nations’ debt. The terms of Cyprus’s bailout are negative for depositors across Europe, and may hurt bank ratings region-wide, Moody’s Investors Service said in a Credit Outlook report today.

‘Dangerous Precedent’

“There’s concerns about the dangerous precedent that this sets in terms of other so-called depositors guarantees,” said Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore. “It’s the defacto break-up of the euro in the fact that having money in a Cyprus bank isn’t worth as much as having money in any other bank.”
The euro trimmed declines as the impact of developments in Cyprus had relatively limited impact on short-maturity Italian and Spanish bonds, said Arne Rasmussen, head of currency research at Danske Bank A/S (DANSKE) in Copenhagen.
Italy’s 10-year bond yield increased three basis points to 4.63 percent after rising as much as 21 basis points. Spain’s 10-year securities climbed five basis points to 4.97 percent.
“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,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in a note to clients. The euro will be sold against a range of currencies including the dollar, Swiss franc and pound, he wrote.
The 17-nation euro tumbled 0.8 percent to 85.83 pence and dropped 0.3 percent to 1.2240 francs.

Market Measure

The euro has weakened 1.3 percent during the past month, the second worst performer afterNorway’s krone of 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It has still strengthened 2.3 percent in the previous six months.
The JPMorgan Chase & Co. G7 Volatility Index (JPMVXYG7), based on three-month options on Group of Seven nations’ currencies, reached 9.4 percent, the highest level since March 4.
The New Zealand currency fell 0.1 percent to 82.63 cents, the Mexican peso dropped 0.1 percent to 12.4398 per dollar and the Australian dollar declined 0.2 percent to $1.0391.
The concern in Cyprus “moves risk-on trade to back seat,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport BeachCalifornia, wrote on Twitter. “Sell euro as well,” he said.
The Hungarian forint fell to a 14 month-low against the euro as concern Europe’s debt crisis will escalate added to the turmoil caused by the government’s plan to cut borrowing costs. The forint slid 1.9 percent last week as Prime Minister Viktor Orban called for lower interest ratesand for measures to help foreign-currency borrowers.
The currency dropped 0.3 percent to 305.99 per euro after sliding to the weakest level since Jan. 18, 2012.
To contact the reporters on this story: Joseph Ciolli in New York at; Anchalee Worrachate in London at
To contact the editor responsible for this story: Dave Liedtka at