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Cyprus Spawns A New 'Deposit Flight' Risk For The EUR

ByDanske Markets
Published 03/25/2013, 02:30 PM
Updated 05/14/2017, 06:45 AM

The latest IMM data covers the week from March 13 to the 19.

Unsurprisingly investors added to EUR shorts during the Cyprus crisis last week with EUR shorts making up close to 25% of open interest at close on Tuesday. With the Cyprus deal in place over the weekend, the tail risk of the country leaving the euro zone has been removed from the single currency but with policymakers having revealed their willingness to involve depositors in financing a country bailout, the risk of depositors in other peripheral countries taking their money out (bank run) in fear of a haircut and/or capital controls in case of debt issues resurfacing has clearly risen following the Cyprus case. This underlines that while EUR has seen an immediate relief rally after the deal and that this could continue on short covering this week, a new 'deposit flight' risk has been introduced to EUR.

Speculators continued to move out of both GBP and CAD last week. While no revolution was seen in Osborne's update of the Bank of England (BoE) remit last week, the government acknowledges that the Old Lady needs more room for manoeuvre in hitting the 2% inflation target. Hence, we think BoE head-to-be Carney will approach his new role with a good deal of aggression which should continue to induce investors to shred sterling. In contrast, we think positioning has become stretched in terms of CAD shorts: things are likely to evolve more smoothly at the Bank of Canada where an insider will probably take over from Carney and keep focus on the need to hike rates further out. This is why in our recent FX Trends we recommended selling a 3M call spread in GBP/CAD.

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