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Cyprus From A Forex Traders Perspective

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.

Cyprus - EURUSD Gap

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?

Please leave a comment below and click the like/share buttons

About Rachel Hunter TraderRachAbout the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex.  Be strategic and design your trading business for sustainable success and have fun!  That’s my mission.  Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies.  Years of precious learning specially packaged up for you.  My background before trading is as a Chartered Accountant and Chief Financial Officer.   I know what it takes to make a trading business rock on.  It would give me great pleasure to make a difference to your success.

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17 Responses so far.


  1. Hi Rach,
    Nice article. I think this whole thing is disgusting, there is no historical precedent for such a massive levy on Joe Public. It’s much worse than the US Gold Reserve Act of 1934 (at least citizens were paid for their gold). I really don’t think it’s going to eventuate, Cyprus has been trending on twitter for 3 days now, there is too much uproar. If the EU/Cypriot government ignore the public outcry it only spells trouble for the Euro Zone. I think the Euro Group are down right evil but they are not stupid.

    Anyone who fought the Germans in either of the World Wars would be rolling in their graves, what was the point? We signed over Europe in the end. Hitler would no doubt be in awe of current German leaders – they pulled off what he couldn’t without firing a single shot.

  2. Martyn Young says:

    Hi Rach

    Very thought provoking article – well done

    The Cypriot financial situation is very close to my heart as I have friends who live in Paphos and I also own a holiday Villa in Paphos and therefore have a bank account

    My friends are really outraged in what they see as outright robbery stealing their hard earned savings which they have brought over from the UK, there are 65,000 ex pats and 3,000 UK servicemen who are being affected by this decision and not less the poor Cypriots who are very passionate & proud about their Country and thought by joining the EU community would solve the Turkish occupation problem in Northern Cyprus

    Yes the EU have brought Cypriots greater investment in road and other capitol infrastructure but as with other EU countries have suffered from high prices especially with food and fuel

    Cyprus and other Eastern European countries have eagerly joined the EU to enjoy increased prosperity and the way Cyprus has been treated has been met with outrage not only with Cypriots but by other EU countries especially those in Spain, Portugal & Italy who now may suffer the same fate

    I feel that the EU decision makers – Germany in particular thought that Cyprus would immediately agree to the bail out terms especially when a stiff warning was made that at least a couple of Cyprus banks would immediately be bankrupt and fold, and would serve a warning shot to other problem EU economies

    The Cyprus Government last night rejected the Bail out offer terms and are now looking to Russia for help, this may also lead to a joint venture in realising the Gas reserves found off the Cyprus coastline. The Banks have indefinitely closed off all ATM machines and are not taking any transactions until the crisis has been solved – this will seriously effect Cypriot Companies trading activities and the day to day living environment of the Cypriot people

    EU decision makers have seriously miscalculated the Cypriot situation and now have another potential mountain to climb to get back some sort of credibility in the Financial markets, I feel now that this is a decision gone too far and I cannot see how the EU is going to survive in the long term, I think Cyprus will leave the EU and the Euro and revert back to the good old Cypriot pound which will be immediately be devalued, this will help the tourism industry which Cyprus so depended on the past 25 years – will Greece do the same!!!

    Once this happens one can see other Countries following suit and how will the Euro dream continue, this will hurt Germany especially as they do now want any Country to leave as it suits their economy

    The EU project has been a Politicians dream led by Germany and France with the object to have more compatibility and to prevent potential wars in the future – I have always felt that the Politicians have never brought the Countries citizens along with their ideology and at some time the good citizens will revolt and take action…. I sincerely hope i do not witness this

    For us Forex Traders this opens up opportunities but one has to ensure extreme caution is made to unexpected announcements especially at weekends with the option to close trades on Friday for the faint hearted!!

    Forex Traders would also want the Euro to survive as the EUR/USD pairing being the most popular giving us many trading opportunities since its inception

    Personally the EU project has been a disaster being okay when things were going well – but there seems there was no contingency plan if anything were to go wrong, and as always its the ordinary Citizens who suffer for the politicians folly

    On a positive note we can always take heart as throughout history has shown that we individuals can eventually prosper from tragedy and that is what shapes our destiny, our courage and hope will always lead us out of tragic events although Politicians will always take the credit

    Determination and inspiration will lead us all to greater things as long as we allow – My belief that Success is measured as 90% persistence and 10% inspiration

    Cheers – Martyn

    • Hi Martyn

      Thank you so much for investing your time in writing such a fantastic honest account of your views and the impact on yourself and your friends of the Cyprus situation. I sincerely hope that the matter is sorted out and you all come out of it wiser and financially unscathed.

      Like you say it sure is a challenge to keep so many countries in the Euro together when times are tough. Most especially with such differences in culture. When I travelled to Europe I found it unreal how you could drive down the road and go from one country to another with such a distinct change in culture, language and landscape. It’s very unusual coming from New Zealand with such isolation and clearly defined sea boundaries. It must present a challenge to keep the peace and explains how historic war events may have happened from the friction of it all. The plan for unity with the Euro is a great concept to bring Europe together but can it survive? It was always going to be a challenge with individual governments making their own financial decisions in respect to their country but a single currency attempting to price it all.

      All the best and thank you for your contribution.

      Kind regards,
      Rachel

  3. Andrew Gibbs says:

    We currently live in a funny left wing world where governments around the world have significantly increased their own debt in order to reduce the impacts of recession. Whilst to some degree increased government spending has kicked the bucket down the road for the time being the levels of government debt are astonomical even in countries like Germany. Politicians in order to get votes must maintain current spending levels, however in reality government need to pay back debt, which means cut backs on government spending for all. It’s human nature to point the finger and blame the banks for the current problems, but really all the banks did was lend out to much money that now cannot be paid back to people like you and me. The problem is everyone has gone on a huge credit binge and now the piper needs to be paid. Cyprus thinks they can just skim 10% of everyones money to pay off some debt but where does it stop. The problem is not just with Cyrpus, every government with high debt:GDP faces some tough choices, if inflation and economic growth pick up and interest rates go up government are screwed, although I guess this is when they’ll start increasing taxes. Given people are not willing to face government spending cuts or reduce the size of govt (France) taxes will need to go up and spending will need to come down, govt’s need budget surplaces to start paying back these debts. Simple.

    • Hi Andrew

      Thanks for your valid points.

      It’s certainly a time of reckoning and time of great shift in the relative wealth and prosperity of countries in the world. The countries who have lived in an unsustainable way are about to pay the price. Unfortunately a lot of people haven’t made that choice personally and become victim as collateral damage.

      Let’s hope it all works out peacefully and a solution is found.

      Cheers Rachel

  4. Sarah Potter says:

    Rach,

    Thanks for this article. You are right that where there is pain there is gain, but my worry is that I’m not sure who is gaining. I think it’s important to shed light on this issue so that everyone understands what is going on.

    • Hi Sarah

      Thanks for contributing.

      You raise a good point. Perhaps for the most part the gain has largely been had through overspending and that’s why things are where they are. There’ll always be someone massively leveraged the Euro short who will gain if it all goes bad. It’s difficult to think about profiting from other people’s pain. :-(

      Cheers Rachel

  5. Erron Adams says:

    Rachel,

    What a great article, and the responses certainly do it justice! I haven’t had much time to actually keep up with this issue (or anything much recently) due to a few home issues and a computer that died on me and had to be replaced :-/

    It is an incredible, or at least barely credible action for the authorities to be taking. I just keep scratching my head and asking “what were they thinking?” It’s as if someone almost deliberately went out of their way to create a panic and run on the banks! It just really doesn’t make sense, although your three points above certainly shed light on all the various factors going on in the background.

    Cyprus is indeed an interesting country from the point of view of forex. As a forex website owner I am continually having to politely decline rather desperate entreaties from the representatives of forex brokerages based in Cyprus, to get featured on my website. I’m fairly picky when it comes to brokers in particular, and though there’s nothing outwardly questionable about either the people or the brokerages who have approached me, the sheer flood of enquiries has given me pause.

    The wider issue of course is how Europe handles the problem. We are still in a situation of having a very sick global economy, and I feel reactions to perceived threats are certainly likely to be exaggerated for quite some time.

    To address your subject – the Cyprus issue from a forex traders perspective – I guess the mercenary approach would be to understand that there are likely to be shorting opportunities in currencies generally perceived to be extended, such as the Aussie. The problem gets to be one of choosing your timescale. There is likely to be a flurry of panicked responses over the coming days, each initiating its own swing or counter swing. This might provide an opportunity on short timeframes (five-minute to an hour say) if you happen to be at your screen at the time. But it would be a brave person who would take up a position trade of great size at the moment I think :-)

    Once again, excellent article and thoughtful replies, many thanks!

    Erron

    • Hi Erron

      Thanks for your contribution to the discussion.

      Sorry to hear you’ve had problems with your computer. I’ll bite my tongue so I don’t get stuck into that topic! I hope you’d read my article “8 Ways A Forex Trader Can Prepare For Computer Failure” http://www.traderrach.com/risk-management/8-ways-a-forex-trader-can-prepare-for-computer-failure/

      It’s likely the Euro problems are not fully priced into the currency. However, how it moves from one destination to the next is always unclear. When using prudent risk management with stop losses you can still get stopped out with a loss even with your direction right if it travels erratically. This can happen any time though, even without this situation.

      I’d be careful about carrying a trade open this weekend in case an announcement came out while the market was closed.

      Cheers Rachel

  6. Hi Rachel,
    very good article about the theft that has been planned by Cyprus authorities. It was disgraceful.
    What happen in Cyprus shows us, in my opinion, the weakness of the European Union and the Eurozone. Europe was a nice project for many europeans but something is wrong since nearly 10 years, when EU was enlarged and when Euro was created.

    First, in 2004, EU was enlarged with former communist countries with weak economies. It was the first big mistake. It is a good idea to build an open area in Europe but it needs time to achieve. At the moment, there isn’t an “European sentiment” as we can see in USA or in other federal country because EU is not a federation. And many people don’t want the EU to become a federation. Currently “eurosceptics” are more and more in several countries.

    Second mistake was to create Euro with countries as different as Greece and Germany in the same area. Another mistake was to forgot to create a real central bank as BoE or Fed, because BCE is not a real central bank. European politicians were not enough practical when they’ve built the currency.
    Eurozone has too many different economic levels and furthermore rich countries as Germany or Netherland are tired to help poorest countries.There is no solidarity. Furthermore the different countries don’t need the same economic policy : weakest countries (Greece, Spain, Italy, Ireland…) need weaker currency and need to be able to modify freely their rate to strengthen their economy.

    This current crisis might have a positive issue if Europe decides to go ahead and evolves to more unified structure. But euro has to be reformed !

    This crisis, in opinion, will weaken euro one more time. In the next few weeks, Eurusd might go down and reach 1.2700 level even if a retracement to 1.30000 is likely (and then move down to 1.2700). Still good opportunities for traders, ahead :)

    • Hi Alain

      Thank you for the excellent points you raise. Great to have the observations and viewpoint from yourself in France.

      I agree that it’s challenging to have a single currency without the same economic policies. How can a country control it’s own economic development if it’s currency can’t float to match it’s own economic reality? The fortunes of each country using the Euro are too diverse.

      Cheers Rach

  7. Ahmad Tawfik says:

    There is a loophole in the Cypriot situation that should be explained, and not just passed over as technocratic detail.

    Originally banks in Cyprus shouldn’t be on the verge of bankruptcy needing bailout. Being a safe haven for off shore companies, Cyprus’s economy is booming with tourism & business. Russian off shore firms alone have invested Euro 68 Bil in Cypriot banks. So bank reserves are high (when compared to the 10 Bil currently needed, and for which the whole fuss is about). Moreover, Cyprus doesn’t have a pension liability problem, nor are they invested in mortgage backed securities gone bust.

    So where has all the money gone?

    We are led to assume that Cypriot banks are heavily invested in Greek debt. Which is interesting, because German & Austrian banks had been holding the Greek bomb. And it got defused by the EU’s ongoing bailouts to Greece. These sustain credit levels to ensure continuity of interest payment on loans. So why hasn’t this bailout relief reached Cypriot banks?

    Its Either that, though Cyprus is a full fledged EU member, and legally stands to gain from the same benefits shared by all EU banks & financial institutions, has been intentionally left out as an expendable asset (which is what Cypriot banks want their public to believe). Or it’s that Cypriot bank debt is an internal, isolated problem, which doesn’t meet ECB rules in the first place, – as stated by Fuchs in Germany today.

    The key to crisis resolution always is in transparency. Cypriot bank debt should be investigated in a transparent manner by the Cypriot parliament, with causes & numbers made distinctly clear to their public. This singles out the culprits for the public, and gets it realistically involved in devising a frame work for the solutions. Or if the case may prove, puts the ECB internationally before it’s pledge of containing Greek debt.

    The fiasco going on at the moment is intended by bankers & lobby politicians to bury their corruption under the Greek rug. (scrape goat). Lets’ hope it ends there, and their intensions aren’t to sell Cyprus as a satellite in Russia’s orbit.

    • Hi Ahmad

      You raise some excellent insights into the Cyprus situation. On the face of it Cyprus did seem to be thriving like you say and I quote you “so where has all the money gone?”.

      I agree transparency is the key. In my experience when something falls over that should be thriving, it can be corruption.

      When the government speaks we’re always told what they want us to hear which is not always the truth laid bare. That’s politics!

      Thank you for contributing to the discussion.

      Cheers Rach

  8. Erron Adams says:

    Hi Rachel,

    It wasn’t a complete disaster as I always keep an off-line cloned disk backup (as in point 5 of your article, i.e. ‘OFFSITE BACK UP STORAGE’) so I was able to carry on with that while I installed the new system. But I had been slack in remaining on Windows XP for so long so the move to system 7 meant a lot of programs needed upgrading and configuration.

    I think it’s not just the Euro problems that aren’t currently fully priced in, but the flip side of that which is that the US – long the beaten down dog – is finally emerging from recession, fingers crossed :-) One or two more significant data releases confirming that should see a decided move in the Euro.

    I haven’t carried trades over the weekend for quite some time now, as I just haven’t had the confidence to do so given the global economic situation and the announcements you mention, which have been more frequent and impactful it seems. But it’s interesting: I did some extensive backtesting on a number of strategies a year or two back and the general result arising out of that process was that overall, you’d be more profitable if you keep positions open over the weekend, at least using those strategies. I guess it comes down to a personal comfort thing. I like to sleep well at night LOL!

    All the best,

    Erron

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