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NY Session: Italian elections send risk sentiment tumbling

Updated Feb 25, 2013 4:30:00 PM By Eric Viloria, CMT

Risk sentiment was markedly lower today as the results of Italy’s elections showed no clear winner at time of writing. Italy has the largest amount of debt outstanding in the Euro zone, and political instability threatens both economic and financial stability which is already quite fragile. Equities tumbled on the uncertainty, Italian yields rose, US yields declined and in FX, the EUR plunged while the JPY outperformed. EUR/JPY was hit hard with the pair falling to session lows below the 119.00 figure after trading at session highs above the 125.00 level (the pair is currently around 119.40). USD/JPY appeared to unravel as well with the pair falling below the 21-day simple moving average (SMA) for the first time since November. The pair is testing bullish channel support and appears to be in a wave 4 correction.

In the US, the Chicago Fed national activity index fell to -0.32 in January from the prior +0.25 and the February Dallas Fed manufacturing index declined by more than expected with a print of 2.2 from the prior 5.5 (cons. 3.0). US markets will be focused on Fed Chairman Bernanke’s testimony before the Senate tomorrow and we expect that he will be dovish as usual despite recent talk from other Fed members of tapering asset purchases.

ECB members were on the wires today with Bundesbank head Weidmann saying that “monetary policy, or for that, matter exchange-rate policy cannot be the solution” to the EU crisis. He stated that “these are structural problems that require structural solutions.” ECB Executive Board member Asmussen also spoke and said that he does not see an inflation threat “in current situation” but that the ECB would act promptly to any inflation threat. The common currency was driven more by developments in Italy however, with EUR/USD plunging below its 100-day SMA, bringing the 1.30 big figure into focus.

Bank of Canada (BoC) Governor Carney cautioned that Canadian data has been “breaking to the downside” and reiterated that the need for stimulus withdrawal is less imminent.  The comments weighed on the Loonie and USD/CAD climbed higher to current levels of around 1.0270.

Data watch

On the data front for the upcoming Asia/Pacific session are New Zealand’s 1Q RBNZ inflation expectations and Japan’s February small business confidence.

Source: eSignal, Forex.com

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