Euro rallies on Italy's budget hopes

The G-10 rundown

USD – the US dollar is easing lower to kick off trading this week on the EUR surge linked to Italy. We’ll have a hard time getting a bearing on the US dollar until we have a better sense of what China wants to do with the renminbi.

EUR – the rally came just in time to avoid a local break lower in EURUSD on Friday, but we’ll need to see a further improvement in Italian yield spreads and more concrete evidence that this round of budget negotiations will reach an amicable conclusion for a more convincing lift-off. As well, watching the October flash PMIs this Wednesday as the persistence of the declines in recent months is a concern. Not seeing the European Central Bank meeting this Thursday as a major catalyst.

JPY – with China rallying and the EU looking up this morning, global bond yields are rising and this all points to a weak JPY, with EURJPY back above 130.00 suddenly after last week’s poke well below a tactically pivotal 129.00 level last week.

GBP – sterling is not thriving as Brexit uncertainty weighs again and the general feeling is that the two sides will take negotiations to the wire, with the special “Brexit summit” in Mid-November now feeling uncomfortably close. Technical test already here in EURGBP as it pokes at the 200-day moving average  again from below (currently 0.8825).

CHF – EU existential risks the critical focus, as made obvious by the EURCHF surge on Friday linked to a rally in Italy’s BTP’s. 1.1500 is the key level there as we discuss above.

AUD – surprising lack of positive contagion into the AUD from the rally in Chinese equities today – perhaps as the USDCNY is keeping the USD somewhat anchored.

CAD – A technical break above tactically important 1.3050 area last week, but the market will want a look at the Bank of Canada decision this week and the forward guidance that comes with the likely 25-basis point rate hike. USDCAD vulnerable to the upside on rate spreads at present.

NZD – the kiwi rallying after last week’s strong Q3 CPI print and as AUDNZD has poked more firmly below the 1.0850 area. On a valuation basis, we see little reason for a large extension of the move lower unless the RBNZ’s Orr changes his tune (far too early for this). AUDNZD yield spreads at the front end of the yield curve still pegged near the highs for the cycle as well.

SEK – EURSEK not far from the key pivot lower just below 10.29 ahead of the Riksbank decision on Wednesday, which may need to confirm the market’s impression that we are set for a December rate hike to progress lower. Reasonably stable risk appetite and avoidance of fresh EU existential pain are additional likely prerequisites for a solid move lower in EURSEK.

NOK – Norges Bank this week may not bring much after the drop in oil prices supports their more cautious stance the last time around. Still potential for NOK upside on valuation if the general mood is not too negative.