Justin Burkhardt | FXFocus.com
What once was a distant noise is now ringing loudly through the streets of Europe. The pain of Cyprus is being felt throughout the Euro-Zone as their inability to curb the current crises is wreaking havoc on the value of the Euro.
The state of the Cypriot economy is disastrous at best, and on the verge of a financial collapse. The impending threat is that there will be a run on the banks, followed by capital flight… This event would inevitably send the economy into a tailspin posing a greater threat on the European Economy as a whole.
The banks are in complete reaction-mode, doing their best to hedge against this “almost” immanent threat. Their initial response? A complete “bank lockdown”. Cypriot banks have been closed for almost two weeks providing account holders with little to no access to personal funds. But today the scene began to shift…
Capital Controls Are a Go
…A slight improvement? Banks are set to re-open tomorrow, but only for 6 hours and with “capital controls” in full effect. These controls will limit the amount of money that account holders can withdraw daily to 300-euros ($383) and will ban transfers to accounts outside of Cyprus.
But wait, there’s more.
How would you feel if all of the sudden the value of YOUR bank account (a sure thing) became an immediate “roll of the dice”? For depositors, in Cypriot banks, with more than 100,000 euros, there is that threat… peace of mind, gone. These individuals could see 40% of their account funds converted into bank shares overnight. Imagine dealing with the fear that nearly half of your savings hinged on the success or failure of an already questionable endeavor.
Account holders with less than 100,000-euros have little to worry about as their funds will not be affected…. Just limited access to the overall account balance.
This decree was imposed by the Central Bank of Cyprus. Controls will be reviewed in the next seven days… losing faith in the banking system yet?
The “Solution”
The TROIKA has agreed to throw money at this crisis, (a bailout) with a twist. Cyprus will be responsible for coming up with 5.8bn euros in order to qualify for a 10bn euro bailout.
The question here is, what happens if Cyprus is not able to raise the capital they need to qualify for the bailout within the 7-day period. How long can this account lock down continue and how will depositors respond once the banks open once again… Is capital flight still in view?
The markets were shaky at best yesterday, but even in the midst of what’s going on in within the global economy; we had a home run day. We were 4 for 4 in the Virtual Trade Room focusing solely on the AUD.USD and the EUR.USD.
Here is a quick recap of our trading activity. I recorded it yesterday, just didn’t have the chance to post it:
Your currency analyst,
Justin Burkhardt
Disclaimer: I am short the AUD.USD
