📝BTPs Could Send EUR/USD Towards 1.00/1.02: ING FX Strategy

Political risk has not had an impact on the euro since the latest Italian government crisis in the summer of 2022. In that same period, the ECB introduced its TPI tool. In September, a new government secured a solid parliament majority after the elections, which contributed toward compressing the BTP-Bund spread. Historically, markets have become exponentially sensitive to the BTP-Bund spread when it crosses the 200bp mark. That is also the threshold that normally coincides with a pick-up of the correlation between Italian spreads and the euro. In the chart below, we see how that correlation has played out with EUR/USD – although on many occasions it was EUR/CHF that showed higher sensitivity to Italian politics, as the franc often emerged as the preferred safe-haven currency when European risks flared up.

Should we see a material deterioration in the Italian bond market – and barring a swift reaction by the ECB to calm investors – EUR/USD downside risks would extend to the 1.00/1.02 area in an environment where US bonds remain under pressure on the back of solid US data and the Federal Reserve remains hawkish. The Swiss franc has typically been a beneficiary of stress in the euro area and EUR/CHF usually has a negative correlation with meaningful widening in the BTPBund spread. During periods of deflation, Swiss authorities would typically intervene to buy FX and prevent the Swiss franc from appreciating too much. H

- ING FX Strategy