Euro Under Pressure Post Italy Poll

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Italy under Pressure as Euro Crisis Spreads

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Italy under Pressure as Euro Crisis Spreads

Article excerpt

VENICE, Italy — Could Italy be next? As Spain becomes the fourth eurozone nation to accept an international bailout, Italian officials are faced anew with a question that has haunted them since Europe’s debt crisis broke open three years ago. When will the financial infection cross our borders?

“There is a permanent risk of contagion,” Italian Prime Minister Mario Monti said at a weekend conference near Venice. “That is why strengthening the eurozone is of collective interest.”

But it is far from clear whether Mr. Monti can keep Italy from being the next big domino to fall. Italian officials are now privately expressing alarm that even a 100 billion-euro bailout for Spain’s banks may not stop the troubles from spreading.

Although Mr. Monti — a former European Commission member who took power in an emergency after the euro crisis forced Silvio Berlusconi from office in November — has a reputation as a savvy leader trusted by international officials, he faces a host of problems at home that may ultimately lead investors to take aim at this too-big-to-fail, 2 trillion-euro economy.

As concern grew about Italy’s prospects, investors were dumping the government bonds Monday, causing the price to dip and the yield, a measure of Italy’s borrowing costs, to rise.

“There’s no doubt contagion will come to Italy,” Daniele Sottile, a managing partner at the Milan-based financial advisors Vitale & Associati, said at the weekend conference, convened by the Council for the United States and Italy on an island near Venice. “It’s proof that the European mechanisms designed to stop the crisis are not working.”

Italy’s pressing issues include the fact that Spain’s acceptance of a bailout means Madrid can no longer serve as a guarantor of one of Europe’s financial firewalls, the European Financial Stability Facility, which is meant to quarantine the debt crisis. That means Italy, Europe’s third-biggest economy, behind Germany and France, will have to shoulder a larger portion of the bill — even as Italy grapples with its own sharp economic downturn. …

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Euro under new pressure

The dollar fell to a four-month low against the yen and hovered near record lows versus the Swiss franc today, while the euro came under fresh pressure as investors sought safe havens on mounting US and euro zone debt problems.

US authorities appeared as far away as ever from reaching a cross-party compromise to raise the debt ceiling and Moody’s said it may cut Spain’s credit rating. This is likely to keep growth-linked currencies, including the Australian and New Zealand dollars subdued.

Urgent efforts to avoid an unprecedented US default hit another snag when conservative Republican lawmakers refused to back a deficit reduction plan proposed by their own leaders, who put off a vote scheduled for last night.

The dollar was down 0.1 per cent against the yen at 77.65 yen, having fallen to a four-month low of 77.448 on trading platform EBS. Japanese finance minister Yoshihiko Noda issued a strong warning about the strong yen, saying he would carefully consider how long Tokyo could ignore current exchange-rate moves without acting.

Expectations of possible intervention and position-squaring ahead of the weekend prevented a further rise in the yen. The dollar found support around 77.50 yen, with traders citing semi-official bids.

“These sovereign debt problems are leading to a decent demand for safe-haven currencies like the yen and the Swiss franc,” said Roberto Mialich, FX strategist at Unicredit.

“How the dollar behaves in the near term will depend a lot on how the credit rating agencies react and whether the US rating is cut.”

Analysts say that even if a last-minute deal to lift the debt limit is struck before the August 2nd deadline, a US rating downgrade appears likely without a comprehensive plan to cut the deficit. A cut would raise US borrowing costs, hurting an already weak economy, and rattle investors.

Many traders expect a sharp fall in the dollar would trigger heavy selling by Japanese margin traders who hold near-record high long dollar positions, aggravating its decline.

In the options market, implied volatilities climbed. One-month vols traded around 10.95 per cent, up from 10.6 per cent yesterday. Dollar/yen risk reversals, a measure of the premium required to hold a put or a call option in a currency pair, also edged out in favour of yen calls with the one-month at 1.9 vols versus 1.8 yesterday.

“Risk reversals are very, very high. That tells me the market is clearly set up for the downside,” said Simon Smollett, options strategist at Credit Agricole.

Debt problems also hit the euro. In a reminder that risks of contagion from the euro zone’s sovereign debt crisis was far from gone, Moody’s placed Spain’s Aa2 credit rating under review for a possible downgrade, citing funding pressures and the precedent set by the region’s second rescue package for Greece.

Spanish and Italian bond yields rose while the euro was last down 0.3 per cent at $1.4290. It got some support from a Greek finance ministry official who said China could provide loans to Greece to fund government bond buy-backs.

“The euro has decent support at $1.4250, but if that level gives way, we could see it fall all the way down to $1.4150,” said Unicredit’s Mialich. The euro fell to a low of $1.4253 yesterday. With investors less willing to take on risk due to the euro zone and US debt problems, the recently outperforming Australian and New Zealand dollars fell prey to profit-taking.

Both currencies, which this week hit multi-year highs, hovered near session lows with the Aussie trading down at $1.0940 and the kiwi 0.6 per cent lower at $0.8655.

The sell-off in the euro and growth-linked currencies supported the Swiss franc. The euro was down 0.4 per cent against the franc at 1.1444 francs while the dollar was flat at 0.8010 francs, not far an all-time low of 0.7990 francs.

(06 NOVEMBER 2020)DAILY MARKET BRIEF 1:Euro under pressure as Italy’s budget deadline approaches

EUR/USD is currently bouncing off a 1.1312 low (31 October), heading toward 1.1430 short-term. Italy’s deficit budget proposal of two weeks ago has pushed the single currency down against major currencies. Meanwhile, the German Bund spread continues to widen as investors handicap Italy’s bankruptcy risk: at 2.92, its highest in 30 months. If Italy does not fall in line with the European Union’s budget guidelines, it will face fines as high as 0.20% of GDP, pushing the government further into bankruptcy which would weigh on the EUR.

The EU Commission is waiting for an Italian budget resubmission, due for 23 November. But Prime Minister Giuseppe Conte says there is alternative and that no changes will be made. The Commission will rule on all EU-members’ budgets on 21 November.

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