- Rates: How long will risk-off last this time?
Risk aversion dominated Asian trading following as the Italian referendum outcome caused PM Renzi to resign. In line with the Brexit-referendum and US elections, we expect such global risk-off to be short-lived. Even the damage on peripheral bond markets could be contained with Thursday’s ECB meeting and possible QE-extension looming.
- Currencies: Euro in the defensive after Italian referendum
EUR/USD dropped temporary to the low 1.05 area after the resignation of Italian PM Renzi. The focus for global currency trading will remain on the consequences of the Italian referendum. A cautious risk-off modus might continue to weigh on EUR/USD and cap the topside of USD/JPY, at least temporary
- US equities ended nearly unchanged as they failed to cling on to (small) gains on a decent, but near-consensus, payrolls report. Overnight, Asian stock markets lose moderate ground in a global risk-off move following the Italian referendum.
- Matteo Renzi is set to resign after suffering a heavy defeat in a referendum on his flagship constitutional reforms, a result that plunges Italy into political crisis and raises fears of turmoil in its banking system.
- Austrians voted against an anti-immigrant populist as their next president by a resounding margin, bucking a trend of nationalist electoral successes across the West. Center-left candidate Van der Bellen won with 53.3% of the vote
- New Zealand PM Key, who won praise for his economic stewardship after the global financial crisis, unexpectedly announced his resignation after eight years in power for personal reasons, backing his finance minister to take the helm.
- President-elect Trump stepped up his rhetoric about Beijing’s economic and military stances, as senior members of his transition team sought to play down concerns that his phone call with Taiwan’s president heralded a break from longstanding U.S. policy on China.
- The Chinese Caixin/Markit services (PMI) rose to 53.1 in November from 52.4 in October, a 16-month high though the increase in new orders dipped slightly and business expectations moderated.
- Oil retreated from a 16-month high overnight, as the Italian referendum led to a risk off move. Brent currently trades around $54/barrel from 54.50 previously.
- Today’s eco calendar contains EMU final services PMI, UK services PMI. Fed Dudley, Evans and Bullard are scheduled to speak and EMU FM’s hope reach a compromise on Greek reforms at the Eurogroup meeting.
Euro sets new correction low after Italian referendum
On Friday, the focus of global (currency) markets was on the US payrolls report. However, the payrolls were too close to expectations to inspire any directional USD move. It was a non-event for USD trading. EUR/USD closed the session at 1.0664 (from 1.0661 Thursday). USD/JPY lost gradually some ground off the reaction top and closed the session at 113.51 (from 114.10).
Overnight, Asian equities are losing up to 1.5% as the ‘No vote’ in the Italian referendum and the resignation of Italian PM Renzi put global markets in risk-off modus. The losses can be qualified as modest. The euro is the obvious victim of the Italian political uncertainty. EUR/USD set a new correction low in the low 1.05 area early in Asia, but reversed part of the initial losses (currently 1.0565). USD/JPY spiked temporary below 113, but also reversed the initial losses. The pair trades currently again in the mid 113 area. The kiwi dollar dropped to NZD/USD 0.7070 after Prime Minister Key announced to step down, but the pair trades currently again in the 0.71 area
Later today, the final EMU Markit business surveys for November shouldn’t stir markets. The EMU retail sales for October are outdated and not very reliable. In the US, the Non-manufacturing ISM is more interesting. It is expected to have marginally increased in November to 55.5 from 54.8 previously. We have no reasons to distance us from the consensus. However, the focus for global trading will be on consequences of the Italian referendum. The outcome for markets is the worst possible as it might be seen not only as a big “no” to Mr. Renzi and his reform plans, but also as a “yes” for the opposition, especially the outsider Five Star Party. The narrowing of the Italian spread of last week might be undone. The spread between German yields and US yields might also widen further. This is a euro negative. So, the euro might stay in the defensive. Markets will also keep a close eye at Italian bank stocks. A sell-off might cause nervousness in other markets, including the currency market. At the end of last week, the euro basically traded sideways as investors didn’t put additional shorts in place going into the Italian referendum. At the same time; the dollar rally also lost slightly momentum. This morning euro weakness is again the name of the game. There is no reason to expect a trend reversal anytime soon.
For now, USD/JPY is holding up fairly well, but we don’t see much upside shortterm if global sentiment turns risk-off and if the rise in core bond yields takes a breather.
From a technical point of view, EUR/USD cleared intermediate support at 1.0851 and 1.0711 (2016 low). The par set a minor new low below the 1.0524/18 support this morning. So, the cycle low at 1.0458 is again on the radar. We maintain a sell-on-upticks bias for EUR/USD. The 38% retracement from the Trump decline comes in at 1.0817. We don’t expect EUR/USD to regain that level. The technical picture for USD/JPY improved too. The pair took out the key resistance at 111.45/91. Next key resistance at 114.50/115 was tested last week but the test was rejected. The pair is moved well into overbought territory. The rally might be ripe for a modest correction.
EUR/USD is testing last defensive ahead of the 1.0458 correction low
EUR/GBP testing next support at 0.8333
On Friday, sterling trading was driven by technical considerations. The UK construction PMI was marginally stronger than expected. BoE’s chief economist Haldane maintained a neutral policy stance, but warned that the BoE shouldn’t tighten policy too hastily. Both factors were no big issue for sterling trading. During the afternoon session, sterling found again a better bid. Some positive comments from UK policy makers on a further cooperation with the EU post Brexit might have played a role. EUR/GBP drifted gradually south reversing Thursday’s late session rebound. The pair closed the session at 0.8389 (from 0.8467). Cable also rebounded sharply as the dollar rally slowed. The pair closed the session at 1.2729.
Today, the UK services PMI is expected slightly softer at 54.00 from 54.5. The report brings important info on the UK economy in the post-Brexit era. However, a big surprise is to have a big impact on sterling trading. The negative euro sentiment after the Italian referendum also weighs on the EUR/GBP cross rate. EUR/GBP is currently testing the 0.8333 support. Last week, EUR/GBP showed tentative signs of a bottoming out process. However, sterling strength is now replaced by euro weakness. So for now there is still no good reason to try to catch the falling knife of EUR/GBP.
EUR/GBP: 0.8333 under heavy pressure.
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