Just when it seemed safe to re-enter the Mediterranean waters, European finance ministers have found another way to de-stabilise the global financial markets. However, the immediate response to plans to dip into depositers savings to cover a funding gap appeared to hit the mark, as there are already reports that European finance ministers "continue to be of the view that small depositers should be treated differently to large depositers", and that they've ordered Cyprus to cancel the levy for smaller accounts.
This backing away from the initial plan has a familiar ring. Just like the Greek debt woes of recent years, the problem here is not Cyprus itself. Frankly, Cyprus could slide whole into the sea with little impact on the global economy. The problem is the precedent - if Cyprus can decide to take depositers cash to paper over budget cracks, what's to stop other European nations from doing the same?
Allowing this situation to develop looks like incompetence.
We can only guess that the Eurofinmin have finally worked out that reaching into depositers pockets has the potential to destroy confidence in banks well beyond Cyprus' borders. Having approved this move, the ministers face only two choices to avert disaster:
1) Abandon altogether the notion of levying deposit funds or
2) Clearly "ring fence" the move as a one off, not applicable anywhere else.
The preferred course here is 1), but the inevitable loss of face it involves makes it a less likely manoeuvre. 2) is therefore the main possibility, accompanied by a watering down of the impact on small investors.
My view is that we are likely to see moves towards this goal this week, possibly as early as tonight. This should spark a sharp reversal in the EUR - and there is a chart set up that matches this fundamental view.
Note the gap between the close on Saturday morning (pre-Cyprus) and the opening on Monday morning. "Gap fills" are a well explored chart trading method, and while there is usually a high probability that the gap will fill, the unknown is timing. That's why the triangle is important.
More aggressive traders could buy at current levels, with a stop loss outside the triangle, somewhere below 1.2945. The classic triangle trade is to buy on the breach of the upper level, at 1.2976, possibly using a stop entry order like: