It has been a while since we have seen any clearly actionable compression (or divergence) trade opportunities in a market that so far in 2012 been abused almost exclusively by central planners and robots. However, today we believe it is time to point out what appears to be a very distinct arb pair: specifically, the divergence between the EURUSD and the Italian-Bund spread. As can be seen on the chart below, the first time we saw a material divergence between the two very tightly correlated series was in mid-March when the phase out of LTRO2 spooked the FX market but still left enough dry powder at Italian banks to provide a fake support for Italian bonds. That did not last long, and the subsequent month saw another push wider in Italian (and Spanish, and all other PIIG) spreads to Bunds, however not wide enough. It appears that a long EURUSD vs. short Italian bonds (or rather Italian-Bund spreads widening) here could provide for substantial alpha, with either roughly 300 pips in EURUSD upside, or nearly 75 bps of Italian spread upside once the dust settles and the two series reconverge.
As usual, we merely point them out and advise readers to have a big balance sheet when putting on pair trades unless they want to get themselves Iskil-led.
h/t Andy Yorks

