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EUR and Italian Yields After Berlusconi Vote

Last updated 11/8/2011 10:50 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The votes are in and Berlusconi's party won but lost Parliamentary majority which leaves the Italian Prime Minister one step closer to resignation even though he will fight vehemently to hang onto his seat. The euro sold off sharply after the votes were tallied because as of this second, Berlusconi is still in office. The opposition party will still try to push for a no confidence vote on the government and the pressure for Berlusconi to resign will increase. Had the ruling party lost today's budget vote, Berlusconi would have had not choice but to bow down quickly and quietly but by winning the vote, he will be keeping his seat warm for the time being. The rise in Italian 10 year bond yields confirm that investors are not pleased with the outcome of today's vote and now demand higher yield for holding Italian bonds. As long as Italian yields continue to rise, the EUR/USD will have a tough time holding onto its gains.

We are getting dangerously close to 7 percent level in Italian bonds, which is the magic number. If Italy’s 10 year bond yields hits 7 percent, the speculation of Italy becoming the next Greece would escalate significantly.     The 7 percent level is a psychologically hobbling number that will require Italy to pay billions more in interest – something they may not be able to afford without external support. The rumors of a margin hike on Italian Treasury Bonds (BTPs) have also returned which if true would be extremely bad for Italy because investors could just end up dumping the bonds rather than put up more margin. Logically, the euro should respond negatively but when margins were increased on Irish bonds back in May, the euro rose.

For the time being, the market will continue to wait with bated breath for Berlusconi's resignation. The next step is to see whether a no confidence vote will still be held.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.