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European Depositors are Easy Prey for Policy Makers – April 1-5

April 1, 2013

Another week was dominated by the events in Cyprus. The country may be one of the tiniest amongst the Euro-zone community in terms of population and GDP contribution, but the message is alarming for the global depositors. Uninsured deposits of over Euro 100.000- will be the most screwed up in the lot for no reason of their own, as some part of their money will be frozen and some will be converted into bank share.

This is the first time that capital control has been applied in Euro-zone region and hence, this is the worst news and warning for all the foreign investors that investing abroad is not safe, as their money is no more guaranteed. We all have to know and accept the reality that this decision was not taken by Cyprus administration alone. The decision was taken with the consent of all 17-Euro currency users and all 27-members countries were informed. It has increased the risk of flight of Capital in all problematic Euro-countries.

What is more concerning is that the global economy is highly inflated, leveraging is nearly 10-times, overall global debt is almost 3 ½ times the size of global GDP, which is close USD 200 trillion. About the size of global derivatives, which is unregulated there are two versions. According to BIS, as of Dec 2011 is USD 647 Trillion, market followers estimate is over USD 1200 Trillion.

There are clear sign of unrest in the Euro-zone regions banking sector, which remains vulnerable and Cyprus is minor test case. Capital control is a clear indicator to all the deposit holders in the region that in future if need arises this could one of the easiest recipe available to the European policy makers and they will not hesitate to limit the flow of funds to a foreign country. Though there could be many obstacles and hindrances to implement such a decision and getting nod from politician could be most difficult task.

One has to realize the fact that out of box solution or window dressing is a temporary fixing method and not alternate to the problem. As this menace of financial market lingers on, risk of larger damage in future will continue to pile up and hence, all recovery will be occasional and short lived because the purpose/strategy is more to do with policy makers face saving approach and to provide support to the financial elite as it does not address the real issue.

Cyprus problem affirmed that Europe is faced with numerous unresolved issues that have not been addressed and since the size of problem is too large, delaying tactic or strategy would cause more damage rather than mending the difficulty. Europe is certainly at the brink of facing another huge problem because of the split after Italian election, as Italy is still in a political gridlock and this could become a cause of yet another disaster unless soon resolved.

Napolitano intention of extending his stay as President of Italy speaks in volume that Europe is still faced with huge risk. Managing of minor economies is always an easy option. Real test would come once cracks re-appear in Europe’s one of the top 5 economies.

Meanwhile, as European worry looms, market will watch policy maker’s behavior on interest rate decision, which is likely to remain on hold. I do not see change in BOE or ECB stance this week, but all eyes will be on its asset purchase program.  However, Friday’s non-farm payroll could once again be the driving force behind market sentiment.
Another important event this week could be the inaugural meeting of BOJ’s new Governor, as he is widely expected to trumpet his easing policy stance, but it’s time to act rather than giving sermons. So watch out for the language, which may not be enough to give the roll.

GOLD $ 1594.50 = Gold is likely to find sellers on the up and only break of $ 1606 will open gates for $ 1618. On the downside it needs to fall below $ 15080-85 for more losses as next support level is around $ 1550-55 zones. Sharp upside move will only be possible if non-farm payroll worsens beyond expectation that could see a possible test of $ 1630-35 levels.
EURO @ 1.2816 = Euro needs to push beyond 1.2925 for a test of 1.2990-00 zones and should find support around 1.2750. Only break risk for deeper fall towards 1.2670. Range for the week 1.2620 – 1.3050
GBP @ 1.5190 = Cable will be top heavy around 1.5280 levels and only break would encourage for 1.5325. However, I see pressure to continue, break of 1.5120 will encourage for more losses that could extend up to 1.5020-40 zones. Range for the week 1.5010- 1.5350.
JPY @ 94.18 = Selling interest of Japanese currency will be often seen on gains. Only break of 93.20 will encourage for a test of 92.40. However break of 95.30 will pave way for a test of 95.90-00 zones. Range for the week 92.50 – 96.50.
AUD @ 1.0418 = Initially we could see softer beginning, but strong support is around 1.0320-40 levels. Break would risk for test of 1.0280-90. On the upside a move beyond 1.0510 would encourage for a test 1.0550-60 zones. Range for the week 1.0280 – 1.0560

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