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Eurozone heading for another summer of uncertainty

Publication Date: 29 May 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav S.

FX & Rates FX UK EU


The 2010 and 2011-2012 euro crises both took the EUR/USD down by between 20 and 25%, which puts the 10% we've seen so far on account of the Italian turmoil in context, says Kit Juckes, Head of FX at investment bank Société Générale. 

In a note to clients, Juckes wrote: "Having rejected the NL/5-star leaders' nomination of Paolo Savona as Economy Minister, Italian President Sergio Mattarella has called on Carlo Cottarelli to form an interim administration. His chances of succeeding are slim and elections are likely in September. Which leaves us 3-4 months of uncertainty ahead of a vote that may be seen as a referendum on Italy's euro-membership.

"The threat of further rating downgrades hangs over the BTP market (and is largely priced-in), and the ECB's plans for providing forward guidance on policy normalisation are up in the air. Which means that the risk of EUR/USD reaching 1.10 by the end of the summer is significantly higher than the possibility of a recovery to 1.20."

With 10-year Bund yields under 30 basis point this morning, and the BTP/Bund spread heading towards 3% at a rate of knots, the City is now calling the Italian situation a full blown crisis.

"EUR/USD fell 20-25% in the 2010 and 2011/2012 crises. Both those falls were almost completely reversed when the crisis passed, but that's for another day, even if that day comes sooner as result of these developments," Juckes says. 

Spreads, yields, rates and politics are all negatives now

Away from Italy, talk about increased oil supply have dragged prices lower, so far, than might have been expected. We still like longs in NOK and while there is little chance of a hike from the Bank of Canada tomorrow, we still like shorts in USD/CAD around 1.30. EUR/SEK too, can fall as the euro crisis progresses. But the more the market gets nervous, the more the biggest winner of all will be the yen.

The data calendar has already thrown out Swedish consumer (soft) and manufacturing (strong) confidence data, and we get Italian confidence figures in an hour. There are US Conference board figures this afternoon as well as the Dallas Fed index, while the ECB's Visco, Mersch, Lautenshclager and Villeroy are all giving speeches.

EUR/USD 1.1550 is the next key psychological level but Juckes can't see it holding. "1.0860, the springboard from which the euro rallied after the French election, should hold," he added.


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