Italy 2-year bond yields are down by almost 29 bps as we start the day
Mind the gap, please. That's the message that Italian bond investors are saying as we begin the week. 2-year bond yields have fallen to their lowest levels since the end of September and the yields spread between Italy and Germany 10-year bonds have tightened to its narrowest level since 5 October:
Despite all the doom and gloom related to Italy over the past two months, all it takes is one word from a ratings agency to provide some sense of relief for Italian assets and the euro. The single currency is now the best performing one among the majors on the day, up by 0.25% against the dollar as EUR/USD now looks to break the 200-hour MA and trades at the highs at 1.1543 currently.
But the big question will be, can this relief jump stay the course?
The risks related to Italy's fiscal responsibility and debt isn't going to go away any time soon but at least with Moody's attaching a stable outlook now, there isn't any immediate major risk of deterioration of investor sentiment/confidence just yet. Should S&P reaffirm the same kind of message at the end of the week, that will feed into the relief that we're seeing today.
However, as mentioned above, that doesn't change the fact that the European Commission is still almost certainly going to reject Italy's budget proposal and Italy looks set to be brought to the discussion table over the next few weeks trying to convince the commission to see their way.
Unless the Italian government decides to forgo some of its political promises, there doesn't look to be any way forward for the latest budget proposal to gain support among the committee overseeing it at the European Commission. The standstill and stall there will keep euro rallies in-check as long as the negativity surrounding it persists.
And until something changes on that front, it's tough to see EUR/USD moving past 1.16 in my view on the back of any Italian budget relief alone.
