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Euro came under additional pressure this week on renewed concerns on Italy, points out the research team at Nomura.

Key Quotes

“It was reported that the new coalition was considering propositions such as asking the ECB to cancel the Italian government bonds it had purchased via the PSPP, or make provisions for countries to exit the euro should they wish. Both these have been removed from the agenda, but BTP/Bund spreads remain around 17bps wider. Our rates strategists have taken profit on their Italy/Spain widener, with the market moving price action seeming to have gone too far. FX markets have also stabilised.”

“The portion of Italian bond investors outside the euro area is very small – just 5%. Therefore, we do not expect EUR to react much to Italy’s politics and think the rates market is a better place to position for Italian political risks. We thus continue to recommend holding EUR long exposures via EUR/USD spot and EUR/CHF and EUR/JPY options.”