Meanwhile stronger than expected German IFO numbers failed to help the euro. The single currency spiked higher after German business confidence hit a 2.5 year high but trended lower quickly thereafter. As we had warned at the beginning of the week, the 3 biggest risks facing the euro were the European Commission's growth forecasts, the Italian elections and the FOMC minutes - and all 3 contributed to the euro's decline. This morning, the European Commission slashed its 2013 GDP forecast to -0.3% from +0.1% but what really made the euro drop to session lows were the reports that LTRO II repayments fell short of expectations. Banks are set to repay only EUR 61.1B next week versus a forecast of EUR100 billion and the miss in LTRO repayment suggests that banks have less excess liquidity or free capital.
With only a few more days to go before the Italian elections, the lack of a clear frontrunner continues to weigh on sentiment. None of the candidates are expected to win a majority and right now, it appears that Bersani is leading slightly in the polls and if he wins he will most likely form a coalition government with Mario Monti's centrists. This is probably the best case scenario since it would offer assurance of continued reform in Italy. However the elections are close and can still go any way and the worst case for investors and the euro would be a win by Berlusconi because he plans to abolish unpopular property taxes that were the cornerstone of Monti's austerity measures. A return to the free spending days of Berlusconi would be a big hit to confidence and would increase the risks of a downgrade for Italy and along these lines, the uncertainty surrounding the Italian elections also poses a risk for the euro.