– EUR to remain vulnerable on Italian election gridlock
The EUR’s sold off sharply after the votes counted for the Italian elections depicted a different outcome from the initial exit polls. While the exit polls gave Bersani’s centre-left coalition a win in both houses, the votes counted suggested a gridlock in the Senate (the upper house), with both coalitions falling well short of the requisite 158 seat majority. The bottom line is that the ‘worst case’ scenario of hung parliament appears to be playing out. While repeat elections, a technical government or a ‘grand coalition’ are the likely way forward, Italian political tensions are likely to remain in place for some time. EURUSD fell from 1.3300 to below 1.3050, EURJPY was sold off from 125.00 to below 120.00, while Italian 10y bond yields closed near 4.50%, after dipping below 4.20%. USDJPY was also sold off to lows 90.86 overnight as UST yields fell below the 1.90%, before recovering back above the 92.00 support in Asia trading. Although we do not believe the Italian situation is similar to Greece due to Italy’s much stronger fiscal position, market sentiment is likely to remain very jittery and the EUR is to remain vulnerable in the days ahead. Beyond the near-term political uncertainty, we believe that the EUR economic fundamentals are still supportive on the back of the reduction in the ECB’s balance sheet and a healthy eurozone external balance position. We stay long EUR, entered at 1.3180 last week, with a target at 1.3800 and stop at 1.2980.
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BNP Paribas