Euro Hits Fresh Yearly Lows as Focus Turns to Italy

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Market Drivers for March 27, 2013
Euro sets fresh YTD lows but sees little follow through so far
UK GDP -0.3% vs. -0.3%
Europe -0.29% Nikkei 0.18%
Oil $96/bbl
Gold $1595/oz.

Europe and Asia:
NZD NBNZ Business Confidence 34.60 vs. 39.40
CHF UBS Consumption Indicator 1.26 vs. 1.15
EUR Euro-zone Consumer Confidence
GE GFK 5.9 vs. 5.9
GBP GDP -0.3%
GBP Current Account -14.0B vs. -12.7B
GBP Total Business Investment -0.8%

North America:
USD Pending Home Sales 9:00
CAD CPI 7:30

Euro tumbled to fresh lows for the year, breaking the 1.2800 barrier in early European dealing as confidence surveys in the region showed further deterioration and focus started to shift to Italy which still remained without a government nearly a month after the elections.

In Europe the slew of confidence surveys showed further weakening as business confidence deteriorated to 90 from 91.1 the month prior while consumer confidence printed as expected at -24. As we noted yesterday, the key issues that are driving the euro lower have less to do with sovereign debt and banking crises in the periphery and more to do with the lack of overall demand which resulting in continued contraction of economic activity across the region.

With Cyprus now off the center stage, the focus in FX has shifted to Italy which a much bigger and more serious problem for the Eurozone. The political uncertainty in Italy remains as the country is unable to form a government. Yesterday Pier Luigi Bersani, leader of the Democrats, came away empty-handed after meeting leaders of the People of Liberty (PDL) party, led by former prime minister Silvio Berlusconi, who stuck to their position that the two groups should form a power-sharing grand coalition. The country therefore remains in a gridlock that is starting to weigh on the EURUSD.

Part of the reason for today’s weakness in the euro was the persistent rumor of a Moody’s downgrade of Italian debt. Given the lackluster results of today’s BTP auctions where the yield on the 5 year rose to 3.65% from 3.59% the period prior, those concerns may be warranted. The euro therefore remains under strong selling pressure and the pair could tumble further towards the 1.2750 level if risk aversion flows accelerate into North American trade.

Boris Schlossberg
Managing Director

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