How can we have confidence in the Euro with the crazy actions of decision-makers that can leave people with little confidence in the banking system and financial stability of Europe?
What could drive the impending decision to take up to 10% of the money of depositors in banks, potentially you and I, and call it a tax, not theft and with no warning for depositors to protect themselves against such actions?
From my research and speculation I’ve only found three reasons for this potential catastrophe:
- Europe is not financially strong enough to bail itself out without extreme measures to directly reduce investors’ fortunes.
- European decision-makers have gone mad and don’t value confidence in the banking system because the situation is so bad it’s out of control.
- There’s talk of laundered Russian money being in Cyprus and Europe has no interest in bailing that out. But by hitting the Russian’s there’s a lot of innocent collateral damage.
Let’s think of the countries in the Eurozone as children for a moment. Can we treat our children so differently and expect to have a good relationship afterwards? Can we hit Cyprus savers who are taking the “safe option”, leaving money in banks, and not have ramifications for years, where people are fearful of investment and where to leave their money?
Beware the Gap!
After the weekend the EURUSD and all Euro cross pairs leapt down on opening. This can really hurt a forex trader if you’ve got an open position going the other way, long the Euro. In fact it was entirely possible to be caught long since the EURUSD had rallied up in the two days preceding the announcement.
A major consideration for a forex trader is risk management. You need to consider whether you’re going to take the risk of leaving trades open during the weekend. Are the potential rewards of letting your trades run into the next week worth it for the additional risk of loss or gain? This loss or gain can be outside your defined risk parameters from a severe market impact event hitting you during a weekend?
The answer to this question will be different for each trader and depends on your appetite to risk and your trading system.
Forex weekend risk is the same as what a trader of a sessional market product goes through every day when their market is closed. This is a major advantage of forex trading where there’s continuous trading throughout the working week. Action can be taken when events actually happen, thereby reducing potential catastrophic harm. It’s like forex traders have only 52 “days” in year.
“Dirty Money” Too Tempting to Turn Away?
If the Cyprus government and other EU nationals knew there was laundered money on Cyprus shores, should they have taken action to stop it? Or was the greed to hold it too great?
New Zealand is introducing Anti-Money Laundering and Counter Financing of Terrorism legislation in June 2013. On face value this may have seemed like extra compliance, but in light of the Cyprus example there can be real value in it. We have a Financial Markets Authority that will enforce compliance of the new legislation. By keeping our shores clean from “dirty money” we can provide a currency and economy of greater confidence. Perhaps more countries should do the same and enforce it.
Are Your Funds Ok?
Many forex traders trade with brokers who are licensed in Cyprus. This raises a lot of questions for those forex traders who are affected.
Where are the client funds held and in what type of accounts? Has the FX broker “borrowed” from the client fund accounts? How will the Cyprus situation impact the FX broker? Can the FX broker withstand the effect on their business of savings taken (if any) or the potential flight of customers?
I’ll leave you with this thought. When there’s pain there’s gain. What opportunities can you see in the market right now?
Let’s do some thinking….
- Have you been hurt by the Euro price movements from Cyprus crisis market shocks?
- What lessons have you learnt from the Euro crisis?
- What would you do differently?
- What’s your opinion of the actions in Cyprus?
- Do you think Cyprus will survive this economically?
Share your thoughts in the comments section below.