Relief Rally May Be Short Lived for Euro and Cable

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Market Drivers October 18, 2018
Rally in BTP helps euro pop
May faces rebellion amongst the ranks
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A bounce in Italian sovereign debt bonds fueled a rally in euro, but it stalled at the 1.1550 level while cable couldn’t clear the 1.3100 figure ahead of a very challenging week for PM May who faces a rebellion in the ranks.

Italian BTPs rose to their best level since September on news that Moody’s kept the rating at stable while dropping it down a notch as expected. The announcement was made late NY afternoon Friday, so today was the first chance for European investors to react to the news, with the relief rally in bonds leading to a pop in EURUSD which took out the 1.1550 barrier in early Frankfurt trade.

Still, the move fizzled at the 1.1550 level as Italians insisted that they will keep the budget deficit at 2.4% of GDP setting up for a showdown with EU after they make the formal presentation to Brussels tomorrow. There was some speculation that the Italians may curb their final proposal to 2.2% of GDP which would still exceed EU limits but would be seen as a face-saving gesture for all sides. So far, however, there have been no amendments to the proposal and markets will wait for Tuesday formal presentation to gauge the next step in the drama.

Meanwhile in UK PM May faces a rebellion in her ranks as the clock keeps ticking on the Brexit deadline with some observers fearing that she may face a no-confidence vote which would only add to the turmoil surrounding the issue. Ireland remains the key stumbling block, but the more hardline members of the Tory party are apparently furious at any notion of a customs union with the EU. Yet abandoning a customs union would plunge UK economy into chaos, as everything from agriculture, to airline travel, to pharmaceuticals to more than 45 Trillion GBP in derivatives products would be in a state of flux under a hard Brexit scenario.

Cable reversed its early morning gains and was trading 1.3060 by London open and if PM May’s political future begins to look wobbly, it could easily plunge towards 1.2900 as the week progresses.

Meanwhile in North America the calendar is quiet at the start of the week with only Canadian wholesale trade on the docket and FX flows will look to equities once again for directional clues, but the news across the Atlantic unsettled, any late day headlines from EU or UK could hit euro and cable hard in NY trade as risk off remains key concern for FX traders.

Boris Schlossberg
Managing Director

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