Market Review - 07/11/2011 21:56 All times in GMT

Euro weakens as Italian bond yields hit record high

The single currency weakened on Monday after Italy's 10-year government bond yields hit a 14-year high. News of Italian PM Silvio Berlusconi facing a no-confidence vote on Tuesday also stoked fears of the eurozone debt crisis spreading to Italy.

Earlier in the day, although euro opened a shade below Friday's close at 1.3790, euro then edged higher from 1.3741 to an intra-day high of 1.3839 at Australian opening after Greek PM George Papandreou struck an agreement with the opposition leader to form a new coalition government, however, the pair tumbled to a session low at 1.3682 in European morning after Italian 10-year government bond yield hit a 14-year high together with weak EU data.

Benchmark Italian government bond yields hit 6.7%, their highest since 1997. Eurozone retail sales fell more than expected at -0.7% m/m and -1.5% y/y vs forecasts of -0.1% and -0.5% respectively.

In other news, a report from Italian newspaper Il Foglio said that Berlusconi may resign but PM Berlusconi quickly clarified and said 'rumours of resignation unfounded.'

Later in NY, euro pared intra-day losses and recovered to 1.3813 after European Investment Bank (EIB) said it could be temporarily be reinforced to support the European banking sector but fell briefly to 1.3729 before rising again to 1.3785 ahead of NY close.

The British pound tracked euro's intra-day movements closely and edged higher in Australia to 1.6079 before tumbling to session low at 1.5980 in European morning. However, price managed to rally strongly to an intra-day high at 1.6080 partly due to cross-buying of sterling against other currencies before stabilising at around 1.60250 ahead of NY close.

The Swiss franc tumbled against the dollar and the euro after Swiss National Bank Chairman Phillip Hildebrand said on Sunday the franc is still highly valued versus the euro and the bank is ready to take further measures to weaken the franc if economic outlook and deflationary developments make it necessary. The pair rallied to 0.9031, its highest since Oct. 20, while the eur/chf also rose strongly from 1.2238 to 1.2410.

In other news, ECB Executive Board member Juergen Stark said euro zone region's debt crisis will be under control in 2 years at the latest. SNB Vice Chairman Thomas Jordan said 'SNB's policy is not competitive devaluation; franc remains very, very strg currency, among most overvalued in the world.'

On the data front, UK halifax house price survey rose 1.2% m/m in Oct vs forecasts of 0.1% and a fall of 0.5% in Sept. Prices decreased only 1.8% y/y vs forecast of a 2.3% drop. The eurozone sentix index fell to -21.2 in November, down from -18.5 in Oct and worse than forecast of -20.0.

Data to be released on Tuesday:

Australia NAB business confidence, trade balance, UK retail sales, house prices, industrial production, manufacturing production, Germany trade balance, import, export, Swiss consumer confidence, Canada housing starts.