HYBRIDS: Hybrids: Week in Review

• In the first real price action of the day for G10 FX, the USD fade has picked up on the break through earlier highs in EURUSD at 1.1547, helping the USD Index show further below the 100-dma of 99.727 that may have helped stem some of the selling pressure into the Monday close and help the formation of the bullish daily candle.
• No specific newsflow behind the gradual fade in the greenback, but we do note the continued demand for USDJPY options, which continue to see higher-than-average interest amid broad intervention speculation. Strikes of note today include broad interest in 161.00 call options, as well as trades consistent with a sizeable 162.05/164.50 call spread rolling off at the end of October. Trade would break even on break above ~162.40.
• The edge lower in the USD is again helping precious metals - we noted earlier today the influence of the 50-day EMA at $4,184.30. Clearance here opens a stronger short-term bull cycle, exposing the July 6 high at $4,203.

• In the FI space, Bund futures maintain a short-term bull theme and this week’s gains have resulted in a breach of the 20-day EMA, and delivered a print above the 50-day EMA, at 125.47. A clear break of the 50-day average would signal scope for a stronger retracement of the recent Jun 30 - Jul 23 bear leg. This would open 125.86, 50.0% retracement of the Jun 30 - Jul 23 bear leg. Key support and the bear trigger has been defined at 124.03, the Jul 23 low.
• Gilt futures traded higher earlier to highlight a short-term bull cycle and a continued retracement of the recent Jun 25 - Jul 23 bear leg. A continuation would signal scope for an extension towards 88.48, the 61.8% retracement of the Jun 25 - Jul 23 bear leg. For bears, a reversal lower would instead signal the end of the latest bounce and refocus attention on key support at 85.77, the Jul 23 low and bear trigger.

This morning, Italian finance minister Giorgetti confirmed plans to utilise the EU’s National Escape Clause in 2027 and 2028. He plans to present a formal request to hike the deficit between September and October, feeding into the budget negotiation process.  Specifically, Italy will spend 0.3% GDP on energy-related measures in 2027/2028, alongside 0.9% GDP on defence spending.

• Use of this fiscal flexibility may keep Italy in an Excessive Deficit Procedure, according to Giorgetti. The Government had previously hoped that they may exit the procedure upon pulling the deficit below 3% in 2026. As of Q1 2026, the 4Q rolling deficit was tracking at 3.0% GDP.
• A deterioration of the primary balance through NEC spending would slow the consolidation of general government debt to GDP. The chart below shows the output of Bloomberg’s static debt model based on the latest IMF projections. Assuming no changes to the path for GDP, interest rates, or fiscal multipliers, a 1.2% increase in the primary deficit across 2027 and 2028 would leave debt/GDP at 138.9% in 2030, compared to 136.5% under the IMF’s existing baseline forecast.
• There hasn’t been much reaction in the 10-year BTP/Bund spread to the news. The spread is currently up 1bp to 76.5bps, continuing to track swings in energy prices and broader risk sentiment.
• Note that Italy has been allocated E14.9bln of loans from the EU’s SAFE programme, but Giorgetti did not address whether it will fully utilise this amount.