EUR/USD (1.3545) The above seven per cent yields on the Italian 10 year bonds are essentially being seen as the main gauge by the markets for the eurozone crisis.
While the yields have increased from six percent in the matter of just eight trading days, it could be argued that it’s the political uncertainty in Italy that makes markets so vulnerable. Italy’s economic statistics are now under scrutiny but essentially the data is not new: high debts, slow growth, weak productivity and innovation. Even Italy’s low birth rate has been highlighted in recent days as an explanation for its woes. Yet none of these have changed in the last eight days. The only real change has been the yield which changes the dynamics of debt accumulation, i.e. a circular reference. Italy’s problem is principally one of perception. Of course, with an average maturity on Italy’s debt of around 7 years, one auction or two at high yields will not add noticeably to the total debt burden. Over the next two years, though approximately €650bn will have to be rolled over, so these perceptions have to be changed swiftly. The markets are looking to the ECB to enact this perception change by stemming the vicious cycle of rising yields, increasing margins calls and further sales. The ECB believes it is the task of governments and will not delve into unlimited sovereign bond-buying.
The euro has all but satisfied the downside risk to 1.3510. If it is violated, further weakness to 1.3380 must be expected.
Market Bias Index
The activity of a single day was sufficient to create perception of euro undervaluation almost across the board. Only the CHF escapes this pattern as it is perceived as even more undervalued than the euro.
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Deutsche Bank
Fixed Income Research – Global