Bloomberg News

Italy Yield Double Top Buoys Euro, BofA Says: Technical Analysis

December 06, 2011

Dec. 5 (Bloomberg) -- Italian bonds began a bullish trend after yields dropped below a key technical level in a move that is poised to spur the euro higher against the dollar, according to Bank of America Merrill Lynch.

Yields on 10-year bonds closed below 6.27 percent today, completing a month-long double top, said MacNeil Curry, head of rates and currencies technical strategy at the Bank of America Corp. unit in New York, in a research note today. The yields failed to rise above 7.47 percent and 7.36 percent in November and may drop to 5.25 percent, which may push the euro higher to $1.3678, according to Curry.

“It should be seen as euro-constructive because it alleviates one of the big concerns about the significant duress that Italy has been under,” Curry said in an interview. “As yields start to reverse, it would suggest that their funding crisis is alleviating for the time being.”

Italy’s 10-year bond yields dropped 73 basis points, or 0.73 percentage point, to 5.95 percent today, closing below 6 percent for the first time since Oct. 27. The euro was little changed at $1.3398 at 2:41 p.m. New York time.

Yields surged above 7 percent on Nov. 9 for the first time since the euro’s inception as investors were concerned over European banks’ access to dollar funding and Italy’s ability to pass austerity measures.

Italy swore in Mario Monti as prime minister on Nov. 16 after Silvio Berlusconi’s resignation. The Federal Reserve, the European Central Bank and four other central banks moved last week to make it cheaper to borrow in dollars.

BofA on Euro

Curry said the euro may rise as high as $1.42 even as many investors remain bearish. Futures traders increased euro-short positions, or bets the currency will drop against the dollar, to 104,302 contracts in the week ended Nov. 29. That’s the most since June 2010.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index. A double top is formed when a security is unable to rise above a certain level twice in succession.

--Editors: Dennis Fitzgerald, Paul Cox

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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