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Global Macro: Italian Gridlock Puts Euro in Jeopardy

Stocks in this article: FXY FXE

NEW YORK ( TheStreet) -- Political strife in Italy, much like the issue we face here in the United States, is having a negative effect on European financial markets.

The first chart below is of the 10 year yield on the Italian government bond.

In recent weeks, a struggle for power in the form of re-election rumors among top parties in Italy's parliament has put into question the sustainability of the country's economic recovery.

Deadlocked Italian elections last February left no party the ability to govern alone, this has meant polarization and political stalemates ever since.

Italy suffers high unemployment and meager growth currently, but added political uncertainty makes recovery efforts that much more difficult.

If parliament cannot make coordinated policy decisions then the country's fiscal operations are in jeopardy.

On top of that, now higher borrowing costs due to the political gridlock, as shown below, make borrowing more expensive for the country.

Low growth and a higher debt expense is a recipe for disaster. If a shakeup were to occur among leaders in the Italian parliament and things became even more uncertain, the entire euro zone could face consequences.

The chart below is of the euro/yen currency cross as represented by CurrencyShares Euro Trust (FXE) over CurrencyShares Japanese Yen Trust (FXY).

The European currency has already corrected lower against the safe haven Japanese yen as uncertainty has arisen over future risks the currency may face.

Italian disruptions have caused investors to sell the euro and buy the perceived safer yen.

Weakness in the euro can also be attributed to the European Central Bank's commitment to keeping interest rates low as the region's economies continue to recover.

The currency pair is reaching levels of technical support, which could mean a resolution within the Italian parliament would act as a catalyst for a stronger euro.

A break below support alongside continued strife among Italian politicians, however, could push the pair lower towards August support levels.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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