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EURO: ### POV: EUR WILL REMAIN RESILIENT TO ITALIAN POLITICS... UNTIL IT DOESN'T
-The relationship between Italian 10y yields and the EUR was tentatively
positive in early 2018, as the USD remained weak and Italian yields calm. But
this correlation has now effectively been reduced to nothing as Italian yields
spike higher, indicating that the single currency is taking Italian political
uncertainty in its stride and as markets see little threat of contagion or
fallout from Rome.
-This pales in comparison to the close correlation between Greek yields and the
EUR in the depths of the EZ debt crisis, in which the EUR would falter on any
move higher in Greek rates.
-This lack of correlation has resulted in FX traders having relatively little
Italian headline risk to consider outside of inconsequential intraday
volatility. Nonetheless, this may not remain the case should the MS5/Lega
coalition move forward with some of their more outlandish plans including
mini-BOT issuance (paying state debts with short-dated notes) or significantly
looser fiscal policy.