18/03/2013: EURUSD 164 gap down on Cyprus. Why we always manage risk first!

Just a quick chart to show the size and scale of the gap down in EURUSD last night based on the weekend news regarding the Cyprus bail-in/bail-out.

There has been less than half-a-dozen plus 100 pip gaps on the EURUSD in the last 4-5- years so this gap is significant and for anyone who was long into the weekend they themselves (like the Cypriots) would have taken a good haircut to their trading accounts.  It’s a fine example of why we always manage risk and never risk more than a small portion of an account on any one trade because you never know when such events might happen.

I’m sure everyone will have heard the news about the Cyprus situation and also some of the rumours that have been circulating. Such rumours as:

1. Angela Merkel wanted a 40% cut of bank deposits in a take-it-or-leave it offer that would punish Russian Mafia Money (and make her look strong to German voters in the run-up to German elections).

2. It was the Cypriot governments idea to include a cut of smaller sub-100k bank deposits in order to not alienate their Russian friends when they go back begging for more Russian money.

3. Russian energy firm Gazprom has offered to restructure the bank debt in return for exploration rights of Cypriot gas fields.

I have no doubt that in the time I’ve written and published this piece there will be a whole host more rumours. Its the latter rumour/offer that interests me most as it links into a bigger geo-political picture including Syria. It’s been well known for some time now that there are significant gas fields in the Eastern Mediterranean that are now viable (commercially and physically)  for production. This would present a boon to those Eastern Med countries and provide Europe with significant gas reserves. The biggest loser from this scenario would be Russia who presently provides a good deal of Europe’s energy.  The fighting in Syria has delayed the move toward production and as long as this goes on Russia continues to benefit from the war. There is no incentive for them to change their obstructive approach in the UN towards finding a settlement.  There have been tales of Russian warships ‘patrolling’ the Eastern Med to prevent meddling from a NATO/UN fleet (basically the US Navy’s 6th Fleet).

I have a soft spot for Cyprus having spent several of my summers in the 90’s based at RAF Akrotiri whilst conducting air-to-air gunnery exercises.  It was noticeable to me in the mid-to-late 90’s that we were beginning to see a Russian influx (they stood out a mile: badly bleached hair, far too much make-up, stone-washed denim jeans and dodgy fashion styles that were a generation out of date!) In those 15 years it has become Limossallograd due to the influx of Russian money and subsequent influence.

If the Gazprom offer is genuine and the Cypriots take the deal then it will have been a very smart move by the Russians. They will have side-stepped pretty much everyone.  It’s all part of what Rudyard Kipling introduced as ‘The Great Game’ which has continued in use to describe the geopolitical machinations of the Great Powers and regional powers as they vie for geopolitical power and influence in the area (courtesy of wikipedia).

I have no idea how this will all play out but the message for traders is always manage risk first and foremost!

Trade well,

Paul