Daily Report: Euro Stays Soft On Italy Political Uncertainties

Euro stays soft as last week's correction continues and is weighed down mildly by the political situation in Italy. With just two weeks before the national election on February 24-25, former prime minister Berlusconi continues to close the gap on frontrunner Bersani. The situation now raises concern that while Bersani could win a majority in the Chamber of Deputies, he might fall short of majority in Senate and would need to ally with Monti. Meanwhile, Berlusconi is still considered an electoral wildcard. An FT article stated that a new term for Berlusconi would be a "disaster for Italy", and warned that Berlusconi is regarded as an "unreliable partner" by European partners and Italy would be risk being "marginalized." Eurozone leaders will meet in Brussels today to debate financial aid for Cyprus and Greece.

SNB Board member Zurbruegg said in an interview that "the Franc is still overvalued, even at current exchange rates", and noted that expanding the balance sheet was a result of the policy as SNB intervened heavily to defend the EUR/CHF 1.2 floor, in particular in Q2 and Q3 of 2012. But that was "inevitable to combat the massive over-valuation of the Swiss franc." Meanwhile, he also emphasized that there are still "euro risks" and "dangers of major exchange-rate movements", and that "minimum exchange rate remains the appropriate instrument for the foreseeable future to ensure price stability" is important.

The Australian dollar remains steady as home-loan approvals dropped for the third month, by -1.5% in December, worse than the expectation of a 0.1% rise. Also, November's figure was revised down to -0.7%. Economists noted that the RBA would be looking for signs of improvement in housing markets. Last week, the RBA said that growth in 2013 would be "below trend" at around 2.5%. CPI would rise 3% in the year to June 2013, and "the unemployment rate is expected to edge higher". The inflation outlook allows for further easing when necessary.

Latest CFTC data indicates that speculations continued to accumulate a euro long position in the week leading to February 5. Meanwhile, they were also paring long positions in both the British pound sterling and the Canadian dollar. Indeed net sterling positions were approaching neutral status and could turn net shorts in the next few weeks. Euro net longs rose for another week to 38.0k contracts, up from prior week's 27.5k. Also, the fourth consecutive week of improvement in net positions, and note that the euro was once more in net shorts for almost entire year in 2012. British pound sterling net longs dropped for another week to 1.2k, compared to the prior week's 10.6k, and was sharply lower than December's high of 37.3k. Yen net shorts dropped slightly to 68.4k down from 71.2k. The Canadian dollar long also dropped again to 27.76k, down from 35.1k. Speculators have been persistently shifting positions from last September's high of 111.9k. Australia dollar net longs dropped sightly to 80.9k, but stayed in range of 75.4k and 103.4k.