Baku, Azerbaijan, May 31
By Anvar Mammadov – Trend:
The action across markets, but especially in Italian sovereign bonds and the euro suggests that the global currency market may be on the other side of a near term climax from the political situation in Italy, Head of FX Strategy / Saxo Bank John Hardy told Trend May 31.
“Further questions remain, of course, and there could be another downdraft if the populists' fresh attempt to cobble together a government fails,” Hardy said. “That news could come as soon as today, as at least one Italian news source (La Stampa) reports that it is do or die today for a government formation to avoid the appointment of Cottarelli as caretaker PM (and the assumption that this act leads to a fresh round of elections).”
“The populists have somewhat cheekily proposed appointing the controversial Savona, who was the immediate cause of President Mattarella’s recent veto of the proposed new government, as foreign minister rather than finance minister,” he said. “A less controversial appointment for the finance minister post has been aired, according to the Italian press this morning.”
“The US dollar and the Japanese yen have been the chief victims of a resurgent euro, and are also broadly weaker against all risky currencies and especially EM as global asset markets are breathing a collective sigh of relief,” Hardy added. “The lifting of some of the pressure from the Italy focus reminds us of the dovish Federal Open Market Committee minutes developments last week that had lowered US rate expectations and were USD bearish independently of the EU existential concerns that were USD bearish as the Fed has pointed.”
“Yesterday, the Bank of Canada surprised with a “hawkish hold” as they heavily revised the language describing their stance on future policy moves, eliminating the “cautious” consideration of further rate hikes and instead adopting a “gradual” hike stance,” he added.
“Rate expectations bounced slightly – and from that perspective the CAD reaction appears a bit exaggerated,” he stressed. “But given the recent downshift in US rate expectations, the rebound in the euro and risk appetite yesterday, not to mention a strong rally in oil prices, were also afoot yesterday, adding to CAD potential.”
“If the market can look through Italy headlines today and tomorrow, the data calendar is getting more interesting, with the latest April PCE inflation data point from the US (the core level finally rising close to the 2.0 percent level and expected at 1.8 percent YoY vs. 1.9 percent in Mar.),” Hardy said. “The EU reports its latest flash May CPI estimate after German flash headline CPI ran much hotter than expected this month (+2.2 percent YoY vs. 1.9 percent expected).”
Follow the author on Twitter: @Anvar_Mammadov