Italian budget plans mark a test of euro's resolve

Elsewhere, the USD has rallied a bit by default and a bit tough to build a story behind that. US long yields are well off their highs for the cycle earlier this week, and yet USDJPY managed to pop to new highs after mixed data from Japan overnight, including a weak Industrial Production figure for August. Hard to see USDJPY sustaining a rally into the next resistance levels above 114.50 without US yields swinging back higher. 

Ahead of the weekend, we have both eyes on Italian BTPs and whether the situation sets in motion a further contagion and real showdown with the EU or whether a bit of market “hostage taking” softens the edges of the populists’ stance. If we get longer term traction on the idea that the EU will have to turn its back on austerity, the 2.4% deficit from Italy would be an easy one to overcome. But we need more signaling on that front from EU governments.

Over the weekend and into early next week, we watch for the degree of UK Conservative Party solidarity on whatever negotiation position it declares before the mid-November EU Summit. The CNY situation remains a nail-biter, but may not see any resolution next week as China’s markets are closed for a national holiday all week. Finally, US PCE inflation today is an interesting test of the post-FOMC reaction in the US dollar and US Treasuries. 

The G-10 rundown

USD – the US dollar stronger against most DM currencies, but global risk appetite looks robust and EM currencies don’t appear concerned. The drivers of USD strength here post FOMC are tough to discern, so we are a bit sceptical.

EUR – existential concerns set in motion by Italy’s budget situation – if the lid can stay on Italian yields, the euro may quickly find a new floor.

JPY – if non-Italian yields get back to a rising tendency and risk appetite stays strong, further JPY weakness may lie ahead. Tactically, the USDJPY break higher on a Friday with no support (so far) from the long end of the US yield curve looks odd.

GBP – sterling a bit passive here, but still relatively firm versus the Euro. We await the Tory party conference this weekend. Only full solidarity can deliver a Brexit, otherwise we risk an extension of the negotiation period, elections and possibly a second referendum down the road.

CHF – the proxy for EU existential risks at the moment – still a change for EURCHF to pick up the pieces here if today’s rise in Italian yields is halted quickly.

AUD – may be getting dragged a bit lower by the weak CNY. As well, the RBA is not expected to bring anything new to the table next Tuesday.

CAD – the loonie is bid ahead of today’s latest Canadian GDP data and as BoC’s Poloz expresses confidence that Canada will reach a trade deal with the US.

NZD – ditto from the Aussie comments – NZ rates are dead in the water. As well, the AUDNZD flirt with sub-1.0900 pivots rejected for now – rate spreads AUDNZD mispricing on the weak side.

SEK – one of the few trends going is the SEK repricing higher – Friday’s are often days for lightening up on positions, however.

NOK – EURNOK pushing solidly below 9.50 for the first time since July and we see further potential for downside into 9.40 at least for now, but more to follow later.

Upcoming Economic Calendar Highlights (all times GMT)

• 0800 – Norway Sep. Unemployment Rate
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• 1230 – US Aug. PCE Inflation
• 1230 – Canada Jul. GDP
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