Italy Takes Limelight from Greece

With Greece moving to a political solution, Italy is moving to center stage.  A national unity government in Greece, with former ECB vice president Papademos seen as slightly more likely than current finance minister Venizelos.  The national unity government will likely secure the 180 super majority vote to approve the late Oct agreement with Europe.  Elections look likely early next year. 

While there was some sigh of relief that initially lifted the euro, as the focus shifted to Italy, the euro fell to almost $1.3680 from the $1.3840 area.   The $1.3850 area corresponds with the 38.2% retracement of the euro's slide from the EU crisis summit euphoria of about $1.4240 on Oct 27 to $1.3610 on Nov 1.  

Italy's Prime Minister Berlusconi was hit with a number of defections over the weekend and this has raised questions over whether the government can pass a procedural issue tomorrow relating to last year's budget.    Italy's generic 10-year bond yield reached a new EMU-era high of 6.67% today.   However, rumors near midday in London that Berlusconi may resign today, to be replaced by a technocratic government, helped the euro recover and saw Italian bonds stabilize.     The market is vulnerable to such rumors, but Belusconi has survived more than 50 confidence votes and his demise has often been foretold (incorrectly).   

That stability may prove fleeting.  The euro's technical tone is fragile with the 5-day moving average crossing below the 20-day average on Friday.   At the IMM, the net speculative shorts slipped a bit to now stand near -60k contracts vs -76k the previous week.  The longs added 5k contracts to 26k and the shorts covered 11.5k contracts to now stand at -86.3k.    Look for the $1.3840-50 area to hold. 

The economic data released today points to additional recessionary conditions in the euro zone.  September retail sales fell 0.7%.  The market expected only a 0.1% decline.  The Sentix sentiment survey for Nov came in at -21.2, the lowest since Aug 09.  German industrial production in Sept dropped 2.7%, a decline 3-4 times larger than the market had expected and the fact that August was revised to show a 0.4% decline instead of the initial 1.0% decline was hardly comforting. 

Swiss CPI was reported lower than expected. Oct consumer prices fell 0.1%.  The market had looked for a 0.2% increase.  The year-over-year rate fell to -0.1% from +0.5% in September.   The EU harmonized rate was -0.5% year-over-year, down from +0.2% in September.  The Swiss franc sold off on the news amid concerns that the increased deflation could prompt the SNB to lower its ceiling for the franc/raise the floor for the euro to CHF1.25 from CHF1.20.  The euro traded to almost CHF1.24 from CHF1.2130 low before the weekend.     The SNB did not show its hand (and in a close call, argued it would not, in the note prior to the weekend).  

The dollar poked through the CHF0.90 level for the first time since Oct 20.  The dollar's 5-day moving average looks poised to cross above the 20-day tomorrow.   The CHF0.9030 tested today corresponds with a 61.8% retracement of the dollar's down move form the early Oct high near CHF0.9315 to the late Oct low near CHF0.8570. 

The G20 meeting turned out to be the dud warned here last week.  The potential for a deal still remains, however, and another G20 meeting is possible late this year or early next year.  Reports suggest that Germany was the main hold out of an agreement that would have seen $250-$300 bln more funding for the IMF, a new 250 bln SDR allocation, which the euro zone countries would used to invest in the EFSF's SPV. 

Ironically, sterling is the strongest of the majors today and seems to be being helped by the fact that it is not in the euro zone, though it does no seem to be doing Sweden or Norway much good.  Sterling may be helped by the stronger than expected Halifax home price  report, showing an unexpected increase of 1.2%.  Cable is trading at its best level since last Tuesday.  Its modicum of strength may be coming through the cross, where euro-sterling is approaching support near GBP0.8530.