CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 87.41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Italian elections: Rising BTP-Bund spread to push EUR/CHF lower?

By Piero Cingari

12:32, 26 September 2022

Share this article
In this article:
EUR/CHF
EUR/CHF
0.99012 USD
0.00244 +0.250%
IT40
Italy 40
24555 USD
-70 -0.280%
USD/CHF
USD/CHF
0.94189 USD
0.00486 +0.520%
EUR/USD
EUR/USD
1.05118 USD
-0.00287 -0.270%
Tags
EUR

Subscribe to Weekly Highlights

The major market events for the week ahead right in your inbox. Subscribe
The leader of the Fratelli d'Italia party, Giorgia Meloni, will be the next Italian Prime Minister – Photo by Stefano Montesi - Corbis/Corbis via Getty Images

The Italian elections saw the centre-right coalition win by a robust margin vis-à-vis the other political forces as broadly expected by opinion polling. Giorgia Meloni, the leader of the ultra-conservative Fratelli d'Italia party, will become Italy's first female Prime Minister. 

The main economic measure promised by Meloni's Fratelli d'Italia during the electoral campaign is a "flat tax" on incremental incomes, though the most specific details will be obtained only after the Minister of Finance is appointed.

The Italian bond market was not overjoyed with the election outcome, owing to concerns about an increased government deficit in the midst of a ballooning overall public debt (155% of GDP).

The Italian 10-year BTP yield rose to 4.5% at the opening on Monday, the highest level since September 2013. The 10-year yield spread between BTP and German Bund has increased to 237 basis points, not that far off the historical worrying region above 300 basis points.

In the past, rising political and fiscal uncertainties in Italy have seen the BTP-Bund spread widening, the italian stock market (IT 40) falling, and the euro depreciating, especially against the safe haven Swiss franc (EUR/CHF). 

Will this time be any different?

BTP-Bund spread: The Italian risk barometer

Italian BTP vs German Bund yield spread – Photo: Capital.com, Source: Tradingview

If there is one metric that can more accurately reflect the evolution of Italy's political and fiscal risks, it is the yield differential between BTP and Bund.

In times of rising political and economic uncertainty, the yield on BTPs increases while the yield on Bunds typically falls, resulting in a wider yield spread between the two sovereigns.

It is critical for investors to remember a historical precedent. This is not the 2011 crisis, which was caused by other factors. However, two months after the 2018 Italian elections, the far-right League and the anti-establishment 5 Star Movement joined forces to form a populist and Eurosceptic coalition. Both the Italian equity and bond markets reacted negatively, resulting in a significant widening of the spread.

Today, Italy can rely on a centre-right coalition with a sizable parliamentary majority, but the possibility of implementing massive tax cuts without appropriate provisions carries the risk of a substantial increase in the country's deficit.

EUR/USD

1.05 Price
-0.270% 1D Chg, %
Long position overnight fee -0.0084%
Short position overnight fee 0.0024%
Overnight fee time 22:00 (UTC)
Spread 0.00006

USD/JPY

136.50 Price
+1.610% 1D Chg, %
Long position overnight fee 0.0047%
Short position overnight fee -0.0127%
Overnight fee time 22:00 (UTC)
Spread 0.008

GBP/JPY

166.72 Price
+1.000% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.034

AUD/USD

0.67 Price
-1.160% 1D Chg, %
Long position overnight fee -0.0053%
Short position overnight fee 0.0006%
Overnight fee time 22:00 (UTC)
Spread 0.00006

If Italian finances are once again scrutinized by the market, and if political relations between Europe and the new far-right Italian government are not ideal, the BTP-Bund spread will likely widen further from here, dragging down both the equity and the currency markets.

What is your sentiment on EUR/CHF?

0.99012
Bullish
or
Bearish
Vote to see Traders sentiment!

Is the Swiss franc a good hedge against Italy's fiscal risks?

BTP-Bund spread and EUR/CHF. Episodes of widening BTP-Bund spread and declining EUR/CHF are indicated in brackets. Image: Capital.com, Source: Tradingview

Historically, the EUR/CHF pair provided a valid hedge against periods of rising fiscal and political risks in Italy, as represented by the widening yield spread between BTP and Bund.

A weaker euro against the Swiss franc has coincided with three periods of widening spread between Italy and Germany (a long one between 2007 and 2012, a shorter one in 2018/19, and the current one beginning in 2021).

Increased fiscal unpredictability in Italy, or into the periphery of the European bond market more generally, drives demand away from the euro and into the safe-haven Swiss franc.

In times of uncertainty, investors seek refuge in safe havens, and the currency market may reflect Switzerland's stability. 

When the outlook for Italy's public finances and the economy worsen, the appeal of the Swiss franc increases.

In May of 2018, when Italy announced a government led by the League and the 5 Star Movement, raising concerns about a larger public deficit, the Italian stock market fell sharply, and the BTP-Bund spread widened by more than 300 basis points.

At that time, the EUR/CHF pair exhibited a trend that was practically identical to that of the Italian FTSE MIB (IT 40). 

If the newly formed Italian government raises concerns about the healthy of public finances in the coming weeks, we could expect a repeat of the 2018 playbook.

EUR/CHF vs FTSE MIB index (IT 40) – Image: Capital.com, Source: Tradingview

Related reading

Rate this article

Share this article

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Latest Forex news

Still looking for a broker you can trust?

Join the 475.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading