Investors flocked out of the euro and into the safe haven status of the yen, with EURJPY falling over 600 pips in less than a day. The pair has since retraced around 200 pips but is finding some sticky ground around 121.00. The sell-off was sparked by a general election in Italy which resulted in a deadlock in the legislature’s upper house. Investors were looking for a sign that Italy was going to continue along its current austerity driven path. Instead, Italians have sent their politicians and broader Europe a clear message that they are largely fed-up with austerity measures.
The big winner was the Five Star Movement, founded by Beppe Grillo, which managed the most outright votes with 25.5%. Although, the centre-left Democratic Party has more votes when its coalition is taken into account. Monti’s Civic Choice, who oversaw the implementation of the austerity measures, was a distant forth.
Overall, it seems likely that the centre-left will hold a majority in the lower house, thanks to Italian election law which gives the winning party an outright majority, but the upper house is in a deadlock. Bersani’s centre-left doesn’t have the votes to hold a majority in the Senate, and the poor performance of Monti’s Civic Choice all but ensures that no collation will hold a majority. After-all, it is unlikely that Bersani can approach Berlusconi’s centre-right party or Grillo’s Five Star Movement. Hence, it seems possible that Italians may have to go back to the polls. There is even talk of an overhaul of Italian election laws. Whatever happens, the idea of a hung parliament is making the market very nervous.
A rising yen and risk-off sentiment hit the Nikkei hard, while the ASX is helped by some dovish talk from the RBA
The Nikkei was one of the hardest hit equity markets, it succumb to negative sentiment in the market following the Italian election results and the corresponding flock to the yen. The Nikkei 225 is down around 1.40% at the time of writing, which is after the index rebounded a little on the back of an unwinding of yen longs. The ASX 200 was sent below 5000 at the open but managed to claw back above this level later in the session after RBA Assistant Governor Debelle signalled that the bank stands ready to cut interest rates if needed.
AUD and NZD
AUDUSD was hit by the assistant governor’s comments, with the pair sinking to a support zone around 1.0250. NZDUSD also suffered a small sell-off but stopped short of breaking a major long-term trend line. A drop in the RBBNZ’s 2-year inflation expectations to 2.2% from 2.3% took the wind out of a retracement in the kiwi later in the session.