– Political uncertainty keeps EUR heavy despite better Italian auction
Post-Italian election uncertainty has seen EUR trade heavily, with EURUSD unable to recover beyond 1.3120 (yesterday’s cap) despite a better Italian bond auction. Italy managed to sell EUR 4bn of the 10Y with a stronger bid/cover despite the rise in risk premium. EURUSD will continue to take its cue from peripheral stress indicators (Italy-Germany 10Y). The spread now at 345bps, maps to about 1.3100 EURUSD judging from the strong correlation of the past year. In Italian politics, Bersani has appealed to Five Star’s Grillo to show he’s willing to jointly govern, however such an alliance is unlikely. While a Bersani-Berlusconi grand-coalition is still possible, this may only provide a limited respite as Italy’s commitment to fiscal reform will be doubtful anyway. In any event, concrete coalition talks are unlikely until mid-March, which implies that uncertainty will stretch into the coming weeks. It seems likely that the stop of 1.2980 on our long EURUSD recommendation (from 1.3180 established last week) is at risk. However, we wouldn’t extrapolate the sharply negative price action seen during Italian political uncertainty in H2 2011. Investors are not currently overweight European assets as was the case then, quite the contrary (see chart below). This means a lower potential for a position unwind to drive EUR lower.
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BNP Paribas