The euro rallied in Monday morning trading, as investors responded with relief to the softest possible ratings cut for Italian debt by rating agency Moody’s on Friday.

The common currency was trading 0.3 per cent higher against the dollar at $1.1548 and 0.24 per cent stronger against the pound at £0.8826, adding to gains from Friday. Italian bond prices also jumped.

“Moody’s open[ed] the door for a euro bounce”, Kit Juckes, an analyst at Société Générale, said on Monday.

The rating agency cut Italy’s credit rating by one notch on Friday and switched the country’s outlook to stable, allaying investors fears the agency could cut the rating more severely or leave the outlook as negative. A more aggressive move would have threatened a tumble into junk territory.

“If history’s a decent guide, and [Italian sovereign bonds] rally from here, [it] will test the resolve of the more recent euro short positions too” — at least until the purchasing managers’ survey data on Wednesday and S&P gives its update on Italian debt on Friday, Mr Juckes said.

“I don’t suppose this is going to be enough to break the euro out of its stifling $1.13-1.18 range, but a visit to the top end isn’t out of the question.”

Warm words from the EU’s economic affairs commissioner Pierre Moscovici over the Italian budget situation that brought on the looming debt crisis failed to impress analyst Ulrich Leuchtmann at Commerzbank, however.

“If someone who previously thought they had to sell [Italian government bonds] and euros, is buying them back as a result of this news flow that seems pretty nonsensical at first glance,” Mr Leuchtmann said.

READ  RUTH SUNDERLAND: FCA has lessons to learn from London Capital & Finance scandal

He acknowledges, however:

It does not matter for anyone how they themselves judge the Italian fiscal situation. What matters for market participants instead is to judge what everyone else may think. A situation such as that is the ideal breeding ground for expectation “bubbles” (aka “rational bubbles”) . . . these bubbles can develop momentum into both directions.

“Today the Italian government will have to comment on the commission’s admonishing letter. It most certainly has the potential to create new rational bubbles. In what direction? The Italian government has the choice.



READ SOURCE

WHAT YOUR THOUGHTS

Please enter your comment!
Please enter your name here