Currency markets found some stabilization in today's session, with the euro and other higher yielders bouncing off their lows from yesterday and overnight.

width=400The main catalyst this morning is the announcement that Italy will try and fast-track the us austerity vote needed before the Prime Minister would step down and a new caretaker government assumes control.

The austerity vote may be held as early as tomorrow, which would pave the way for an exit by Silvio Burlesconi as early as Monday. To head the new government, the most widely thrown about name has been Maria Monti because of his financial background.

Italian 10-Year Eases, But Italy Pays 6% For 1-Year Auction

As we saw yesterday Italy's yields had shot above the 7% level creating market concern that if yields were to remain there for an extended period of time, they would become unsustainable.

The Italian Treasury decided to go ahead with its auction of one year bills worth €5 billion today, despite the turmoil, and the auction was fully subscribed. However, Italy paid a steep 6.087% to sell those Treasuries from 3.57% just last month.

From Financial Times: Italy also sold €5bn of 12-month bills for a yield of 6.09 per cent and a cover of 1.98 times. This is the highest level for an auction of this maturity since January 1997, according to data from Reuters. The yields, however, were lower than secondary market 12-month bills that are priced at yields of 8.45 per cent.

Traders said the auction was pre-arranged and primary dealer banks would have been told they had to buy the debt.

The 10 year yield meanwhile fell down to 7.05% as the ECB was in the market helping support Italian debt.


Meanwhile, comments from Governing Council member Klass Knot, the head of the Dutch central bank, said that the ECB can't do much more to stem the crisis, a blow to those calling for the ECB to step up its efforts by becoming a lender of last resort, and printing money to buy bonds (quantitative easing).

While the ECB has bought close to €100 billion of periphery debt since starting purchases of Italian debt in August (and €183 billion of distressed nations bonds since starting up its bond buying program), it at the same time sterilize its purchases by draining liquidity from the banking sector which can have the negative effect drying up credit.

From Bloomberg: Not much more can be expected from us, it's up to the governments, Governing Council member Klaas Knot, who heads the Dutch central bank, told lawmakers in The Hague today. Three other policy makers have also publicly rejected calls for more ECB intervention and two further officials, who spoke on condition of anonymity, said the central bank has no plans to make its purchase program unlimited.

Knot said the ECB can maintain its bond buying as long as it can continue to remove the same amount of money from the system. The bigger the portfolio, the more difficult that becomes, he said. Interventions can only have a temporary and very limited effect, Knot added.

Rabobank economist Elwin de Groot estimates there is a natural limit of 300 billion euros the ECB can sterilize.

We will continue to follow developments in Italy as right now that is that the center of markets attention, though certainly the news today is a calming force. Let's see how long this calm lasts.

- Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.