EUR short sell as Italy’s Yield Climbs

Easy come easy go so far. Positive weekend Euro developments certainly tried to give the EUR a lift, old resistance levels were nearly tested in the Asian session, but alas, gains were not sustainable into the “important” Italian 5-year auction. Naturally, the market has been focusing on whether the ECB would start buying Italian bonds following the progress on Italian politics. If they were to buy in size, risk position holding would have got the thumbs up. Failure to appear and the markets would be back playing that negative tune.

Italy’s Tesoro tapped Euro 3b 9/16’s in what ended up being a “so-so” result. The resulting cover of 1.47 was below the 1.5 average. Bigger picture, it was a small auction, with too much market emphasis being put on it. It was taken down in a slightly upbeat market coming on the back of Berlusconi’s departure and Monti’s new tenure. Technically, further improvements from here would have been tough at least without ramped up buying coming from the EFSF or the ECB and we know that is not happening. Hence the spike in yields!

Market sentiment remains fragile and even the slightest sign that Italy does not intend to do it utmost, capital markets will punish them. So far, the reaction of various Italian parties highlights that support for Monti is tenuous and that “reforms can easily be derailed”. European Banks are under intense regulatory pressure and do not have the stomach to digest more “periphery” debt, if anything, they want to reduce their excess risk. Currently, the market is back to unwinding the event risk weekend premium that was put on during North Americas partial off-day last Friday.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell