It took less than 48 hours for Italy’s most sensitive 2-year yields to add 200 basis points (bps), spiking Italian bond yields by 2.70 per cent from negative yields. This was a result of the political turmoil in Italy that rattled the Italian treasuries and the Euro.
Italy is the third largest economy in the Euro zone with 17 per cent gross national income (GNI), after Germany and France. The turmoil started when no political group won an outright majority in the Italian elections, resulting in a hung parliament. Prime Minister designate Luigi Di Maio threatened to reject elections after Italian President Serigo Mattarella vetoed the appointment of Eurosceptic Paolo Savona as finance minister.
Investors across the globe grew nervous as speculations of re-elections increased which would strengthen the political parties Five Star Movement and Far Right League whose agenda is fiscal expansion and debt renegotiation. Italy has highest debt to GDP ratio in the Euro zone with Euro 800 billion debt refinancing due. After three months of negotiations, Five Star Movement and Far Right League formed a coalition government, which gave minor relief to the yields and took the Euro higher.
However, lack of signs on scraping debt negotiations, softer economic data and Italy’s political tensions soon dragged the Euro lower. The unclear political situation and lack of hopes of Euro Zone economy rebounding should continue to weigh down the Euro. For the EUR-USD pair, a break of 1.1700 is expected to add more weakness towards 1.1450 levels ahead of the Fed policy meeting next week.
The author is a Fundamental Research Analyst at Karvy Forex and Currencies Pvt Ltd