Morning Commentary: Italians Heading for a Showdown

Foreign Exchange - Morning Commentary

Italians Heading for a Showdown

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Italian politics and the expansive budget they laid out last week are continuing to roil the markets and send the euro down for the fifth consecutive day. Overlaid on top of concerns about excessive Italian debt and an Italian bond market under pressure already have been fiery exchanges from Italian politicians combined with the head of European commission warning of another Greek-style crisis.
The Deputy PM of Italy said the Italian government will not retreat by even a “millimeter” from its 2.4% budget deficit target, and another Italian politician said that the euro was “not sufficient” to solve Italy’s fiscal problems implying that Italy could solve its financial and fiscal problems if it had its own currency. Italy’s debt to GDP ratio resides near 130% and ranks only behind Greece currently.
Markets are always looking forward and Italian bond holders are voting with their feet right now as the new government pushes on with their political agenda. Since September 17, Italian 3-year interest rates have jumped by 80 bps and the bellwether Italian 10-year bond is up by nearly 45 bps with most of those moves in the last four business days.
This is just one more example of economic nationalism on the rise over the past few years. Italian politicians may well move ahead with their political agenda that they promised Italian voters, but they well could pay for their fiscal expediency either through the markets driving Italian yields through the roof or with a head-on confrontation with the EU. For today, the Italian hubris has caused European stocks to stumble again and has rippled through the emerging market sector once again.
  • The Reserve Bank of Australia (RBA) kept interest rates unchanged as expected at 1.50%. Besides concerns about an economy that remains lackluster in general, ongoing concerns about the slowing Chinese economy will keep the RBA tilted toward the dovish side for the near term. The Aussie dollar is down sharply today.
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