Talking Points:
- Euro, British Pound drop on Italian financial instability worries
- NZ Dollar gains with local bonds, yield appeal a possible driver
- Illiquidity may continue to amplify knee-jerk FX market volatility
The Euro and the British Pound underperformed overnight, extending a selloff that began in Europe yesterday. That move began concurrently with an Italian 6-month bill sale where yields fell to -0.317 percent, the lowest in at least 34 years. Italy’s benchmark FTSE/MIB stock index also fell alongside Sterling and the single currency. Taken together, this speaks to rising concern about Italian financial stability.
The move may be a latent response to Monday’s ECB statement saying embattled lender Monte dei Paschi di Siena needs €8.8 billion to cover its balance sheetshortfall. This exceeds a prior estimate of €5 billion and the €6.3 billion said to be due from Italy’s government (according to local media). Holiday closures may account for the markets’ delayed response. The UK unit appears to have suffered by regional association.
The New Zealand Dollar traded broadly higher, rising alongside the island nation’s baseline 10-year government bond. The move may reflect a pickup in demand for NZD-denominated assets as traders consider the appeal of the highest-yielding currency in the G10 FX space. The RBNZ is the only central bank besides the Fed that is expected to raise rates in 2017, issuing one hike per priced-in bets implied in OIS rates.
Another quiet day is ahead on the European economic data front. However, as noted yesterday, that need not mean that volatility risk can be dismissed. Indeed, the sudden drop in European currencies over the past 24 hours seems to be a textbook case study in the amplifying effects of illiquid market conditions on moves that might have been shallower in normal trade. With that in mind, caution remains important.
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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