Euro Dived on Italy Vote - 26.2.2013
The single currency fell on Tuesday to a 7-week low against the US dollar after Italy’s first parliamentary election results were released to the public. As markets widely expected center left headed by Pier Luigi Bersani won the lower house. However no party o possible coalition got enough votes to form a majority in the upper house. As a consequence Italy enters a period of increased uncertainty with a fractured parliament – an outcome that complicates recovery of the third euro area’s economy. From the point of view of market participants the election outcome is one of the most negative for the single currency.
Next month the parliament will have to form a new government, but it could be a very complicated task. Tired from austerity measures Italians gave more than a half of the votes to parties which have been widely criticized Monti’s previous government policy. With higher taxes and lower spending Monti managed to avoid financial deadlock. Now the single currency gets more pressure on concerns regarding a new wave of financial turbulence in the euro area. The yield on 10-year Italy’s government bonds jumped at opening on Tuesday to a 2-month high of 4.62%.
The euro also dropped considerably against the Japanese yen. After rising yesterday to 125.20, the pair fell to a 5-week low 118.74. In the morning today it was trading around 120.00. A similar picture against the yen was drawn by the US dollar. Yesterday pair USDJPY fell from 94.29 to 90.93. Today in the morning it is trading around 92.00. In our opinion, the medium term trend of the yen’s weakening is still strong and we consider opportunities to go long on USDJPY on rollbacks toward support level 90.20. Pair EURUSD is currently trading slightly above an important support area of 1.3000-1.3030. A break of that area would potentially open way toward 1.27.