The week started out with a bang as the EU bailout proposal for Cyprus roiled the FX markets before trading commenced. The Euro, Yen and the Dollar were affected the most as risk aversion once again became the dominant theme.
According to EU proposal, this bailout plan involves all depositors in Cyprus taking haircuts of 6.75%-9.9%. Needless to say this is NOT sitting well with the citizens of that country for obvious reasons. The rest of the countries in peripheral Europe probably view this as an ill thought-out rescue plan as well given that savers beyond EUR100,000 will be forced to participate in the bailout.
This is a new twist to the solutions already posed for the Euro-crisis and creates uncertainty about deposit stability in the the entire Euro zone. Additionally, the Cypriots are due to vote on this proposed bank tax levy today and passage of this is by no means a done deal. It is safe to assume that bail-out conditionality is here to stay and the prospects of this for other peripheral nations is what is adding to the angst that is facing the financial markets.
The usual "formula" for risk-off conditions is apparent again as the Dollar is stronger -vs- all the majors, especially the Euro, but weaker -vs- the Japanese currency. (YEN > USD > EUR et al.) Below is a weekly chart of the EUR/USD and the sell-off has stopped just ahead of the 50% retracement of the upmove from 1.2043 to 1.3711. One suspects that there must be some heavy stops beneath which, if hit, could trigger a much deeper move lower in the common currency.