Forex today: thin holiday trade sees euro off to the cleaners due to political angst in Europe

• Forex today has been all about European politics while the US and UK were out on holidays.
• Italy remains in political turmoil and the heat has been turned up.

The Italian President, Sergio Mattarella, is now facing impeachment after he vetoed a choice for finance minister, saying that there are too many risks for investors due to the worsened spread between Italian and German 10-year government bond yields, (a key measure of risk).

This has cut a bid by Italy’s two populist parties to form a coalition. Instead,  parliament may demand the president step down based on a simple majority vote. If the vote is in favour, the country’s constitutional court will decide whether to impeach or not.

Italian shares fell 2.1% as a result and the Italian 10 year government bond yield rallied 22 basis points, causing some contagion in Spain (+6bp) and Portugal (+10bp) while German 10 year bund yields lost 6bp. At the same time, Spanish politics is joining Italy’s in becoming problematic for the European Union.

The nation is on the slim edge of the wedge when it comes to the possibility of elections after a no-confidence has motion rocked the Madrid establishment, potentially, pulling the eurozone into a fresh crisis.  Mr Rajoy, the Prime Minister, has warned that the political instability will wreak havoc on Spain’s fragile economic recovery following claims over illegal payments from a slush fund run by the Popular Party’s ex-treasurer, Luis Barcenas.  

Currency action

As a result of all this, the EUR/USD had initially jumped with the euroscepticism priced out of the unit in early Asia trade yesterday, gapping from 1.1610 to above 1.1720 but then rolled over to 1.1625 as traders weighed up the havoc this could spur up.

As for the pound, it pretty much trades in tow with the euro, with dollar flows picking up the bid. Sterling dropped from 1.3340 to 1.3296. There was some stability at the lows and the pair floated back to 1.3315. The cross dropped from 0.8794 and down to 0.8724 caught up in the European political angst.  

For USD/JPY, the risk-averse sentiment pressured US yields lows, (Although the cash bond market was closed for the holiday). The 10-year treasury note futures instead implied a further 5bp fall to below 2.90% – a three-week low. The yen, however, was quietly around 109.40 ending the day flat overall.  

AUD/USD popped through the 10-hr SMA at 0.7562, capped at 0.7581 after falling from 0.7580 in Asia down to 0.7539 the low. The Kiwi was less traumatised by the risk-off sentiment, drifting from 0.6959 down to 0.6935.