Well I guess traders didn’t like the outcome of the Italian elections. After falling hard through the North American trading session yesterday, the EUR continued lower testing a major support level at 1.3020, before bouncing back into the 1.3070-80 range as I write this. The market has become overwhelmingly oversold, so there is the chance of “short covering”.
So with the votes pretty much concluded in the election, no victor has emerged. Bersani seems to have won control of the lower house, with 29.54% of the vote, narrowly defeating Berlusconi who received 29.18% of the vote. A coalition between Bersani and Monti will not have enough seats for a majority in the upper house. In order for legislation to be passed, approval much happen in both chambers, so at the present time the Italian political system is stuck. According to analysts, it could take weeks to settle this problem and there is also the possibility for a new election to be called.
Adding to the overwhelming sell off of the EUR was the initial exit polls yesterday which seemed to give traders confidence in the outcome of the election and therefore confidence in buying the EUR. Yesterday I mentioned a “buy the rumor, sell the fact“ trading mentality and we certainly witnessed that.
The problem with a stalemate in the elections is that this will force a halt to the reforms set by the Monti government that were required by the ECB to receive financial aid. Unless these reforms continue the ECB, through their OMT (outright monetary transactions) are pretty much useless in terms of helping Italy. The ECB set up the OMT to make purchases in secondary sovereign bond markets to aid Euro zone members. If you recall, when ECB President Draghi announced this program, the problem of uncontrolled high yield bonds in Italy and Spain seemed to disappear.
So, what now? Needless to say, a period of uncertainty in Italy will continue to keep pressure on the EUR. Political instability is not exactly uncommon in Italy and traders will at some point become more comfortable with that notion.
Technically, the level below 1.3020 is 1.2995-1.3000, although unless there is more unsettling news out of Italy today, I think we have seen the low. Given an oversold situation that we seem to be in at the moment, quick pullbacks seem more likely today.
Later this morning, the market will switch their attention to our side of the Atlantic as FED Chairman Ben Bernanke testifies at the Senate Banking Committee. Given the attention the latest FED minutes received concerning the possibility of an earlier end to quantitative easing, Mr. Bernanke’s remarks will be closely scrutinized. US release of consumer confidence also occurs today.
In other currencies, the “risk off” mentality gave strength to the JPY as well as the USD. CHF and GBP moved higher based on EUR cross selling.
This could be an interesting morning. As I am finishing writing this, the EUR is once again testing the 1.3100 level. Resistance above there is at 1.3130. The overnight high was 1.3108, and a break there could see some short covering.
“Please keep your seat belts buckled, as I believe we will be heading into some turbulence in the next few hours”.
Further reading: EUR/JPY returns one month and 600 pips on the Italian political mess
Share
