Euro Tests 1.1700 as Italy Budget in Flux

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Market Drivers September 27, 2018
Italy budget impasse drive euro lower
Loonie feels Trump’s wrath
Nikkei +0.99% d Dax -0.09%
Oil $72/bbl
Gold $1194/oz.
Bitcoin $6400

Europe and Asia:
NZD RBNZ stays at 1.75%

North America:
USD Durable Goods 8:30
USD Final GDP 8:30

Euro took a tumble in early European trade today breaching the 1.1700 on reports that Italian government could delay its budget meeting as authorities worked on final details.

Markets have been keeping a close eye on Italy’s budget which is expected to come in at only 2% deficit, well within the EU limits. However, the newly elected populist government has been pushing for higher deficit targets as it seeks to stimulate the moribund Italian economy.

The tug of war within the Italian cabinet has created jitters in the currency market, as Italy with its gigantic 130% debt to GDP ratio poses a sovereign debt problem for the entire region if the country’s yields begin to diverge markedly from the core.

The latest out of Rome suggests that Italy’s La Lega party which is part of the ruling coalition agrees with Five Star leader Silvio Di Maio that the budget deficit should be wider. However, both are opposed by the Finance Minister Giovanni Tria who is seen as a fiscal hawk.

Any sort of compromise as long as it does not exceed the budget by markedly greater than 2% would be viewed with relief by the market and the euro which has held up remarkably well over the past several weeks could see a short covering move back towards 1.1800. However, if Mr. Tria resigns, triggering a budget crisis, the EURUSD could quickly tumble towards 1.1600 on renewed fears of a sovereign debt crisis.

Elsewhere the loonie took a beating as well after Trump trashed Trudeau in the presser stating “His tariffs are too high, and he doesn’t seem to want to move, and I’ve told him ‘forget about it,'” he told reporters about a face-to-face meeting. It appears highly unlikely that Canada will be able to join the new NAFTA agreement and Trump administration is seeking to do a bilateral deal with Mexico alone. However, such a move would require the approval of Congress and even the most hardened Republicans are unlikely to support a one-sided deal that leave US biggest trading partner out of the agreement. The loonie fell in overnight trade with USDCAD popping to 1.3050 in overnight trade, but given lack of progress on negotiation the pair has held up remarkably well indicating that markets are dismissing the political drama for the moment.

The North American session should be relatively quiet on the economic front with only Durable Goods and final GDP readings on the docket and dollar’s less than stellar performance post FOMC rate hike suggests that the unit may have peaked for now, especially against the yen with USDJPY rejecting the 113.00 in yesterday’s trade. US yields have backed off their highs as well and if the 10 year again moves towards the 3.00% level USDJPY could see 112.00 before end of the week.

Boris Schlossberg
Managing Director

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