– EUR to remain focused on bond yield spreads
Italian post-election uncertainty is persisting with the Five Star Alliance leader Beppe Grillo rejecting calls by the PD leader Pier Luigi Bersani to back a coalition. Despite that, EUR has shown some notable resilience, firming to around 1.3140. A relatively smooth bond auction where Italy managed to sell EUR 4bn of the 10Y with a stronger bid/cover despite the rise in risk premium was probably the main factor contributing to the stronger tone. Support from the EURJPY cross, where dip buyers have emerged against the backdrop of patchy liquidity also played a role. EURUSD will continue to take its cue from peripheral stress indicators (Italy-Germany 10Y). The spread at 335bps maps to just over 1.3100 EURUSD judging from the strong correlation over the past year. The 5.0% level is likely to be the critical threshold for Italian 10y yields, which have actually fallen somewhat over the past session. We suspect that serious coalition talks in Italy are unlikely to take place until parliament convenes in mid-March. This suggests that the 1.2980 stop-loss on our long EURUSD trade recommendation remains vulnerable. That said, we do not see a wholesale return of the European debt crisis at this stage. This means the EUR’s path will depend on whether the economic recovery will sustain itself and if the ECB refrains from policy easing.
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BNP Paribas