'Take advantage' of the euro selloff: analyst

The selloff in the euro after the inconclusive Italian election looks overdone and investors should take advantage of it, an analyst says

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Uncertainty about the future of Italy after inconclusive elections has hit emerging markets and also prompted a sharp fall of the euro against the dollar.

The single European currency fell from $1.33 to a little above $1.30 in the space of one day on Monday and is now hovering just below $1.31.

Yields on Italian and Spanish bonds rose, prompting some analysts to say the there are now questions over the effectiveness of the European Central Bank’s Outright Monetary Transactions (OMT), the plan to buy stricken eurozone countries’ bonds if they undertake severe readjustment reforms that has been keeping debt markets calm since it was announced last year.

But Arne Lohmann Rasmussen, chief analyst at Danske Bank, says that despite uncertainty in Italy, positive sentiment is returning to the market after “a bunch of positive US economic data” such as new home sales surging by 15.6%, house prices increasing by 0.6% in January and consumer confidence rising to 69.6.

Federal Reserve Chairman Ben Bernanke has also defended the central bank’s quantitative easing programme, halting market speculation that the Fed would withdraw from its easing policy early due to improving data.

Two Italian debt auctions on Wednesday were oversubscribed, showing strong demand for the bonds; yields crept up but not by a huge amount.

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Italy sold 4 billion euros ($5.2 billion) in 10-year bonds at an average yield of 4.83% versus 4.17% in a similar auction in January, and 2.5 billion in 5-year bonds at an average yield of 3.59% compared with 2.94% in January.

“The calmer Italian bond market, Bernanke’s dovish comments and technical indicators like 14-day RSI (price momentum) that is approaching 30 indicate that the selloff in EUR/USD is now exaggerated,” Rasmussen wrote in a market note.

“It means that we recommend clients to start gradually building EUR/USD longs and increase USD assets/income hedges.”

In technical analysis, the RSI – relative strength index – is an indicator used to chart the current and historical weakness or strength, based on the closing prices, and it is typically used for a 14-day period. It uses measures on a scale from 0 to 100, with the high at 70 and the low at 30.

Rasmussen believes that “a more significant bear market in risk assets” or a more pronounced selloff on the European sovereign bond market is needed for the euro to fall below $1.30 and towards $1.25.

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