Italian budget fears take center stage again

Summary

• USDCAD: Dollar/CAD is finally bouncing a little bit this morning, as Italian budget fears take center stage yet again, but the move higher has been rather moderate.  November crude oil is trading flat after exploding higher yesterday on reports that Iranians exports are dropping further ahead of the sanctions that take effect next month.  The USMCA news now sees the OIS market fully pricing a 25bp rate hike from the Bank of Canada when it meets next on October 24th, and another 100bp of further tightening before the end of 2019.  Today’s North American calendar is light on the data docket, but we will have a speech from the Fed’s Powell before the National Association for Business Economics in Boston at 12:45pmET, titled: “The Outlook for Employment and Inflation”.  We think USDCAD remains on the defensive here sub 1.2870s (bottom edge of Sunday’s opening gap), but we still see a risk of this gap filling at some point this week (given tendencies for market gaps to fill).  A break of yesterday’s lows (1.2780s) would invite further selling into the 1.2730s.

• EURUSD: Euro/dollar is trading down again this morning as the Italian and EU ministers continue to publicly debate the proposed Italian budget.  Yesterday’s concerns from the EU’s Moscovici sent Italian yields higher and EURUSD under support in the 1.1570s.  Today, it’s negative comments from the EC Commission VP Valdis Dombrovskis, ECB member Rehn, and Austria’s finance minister Loeger.  Adding to this negativity were some comments from Italian Lega minister Borghi who said Italy would solve most of its problems if it had its own currency.  Borghi and PM Conte had to quickly dial back this rhetoric in an attempt to calm markets.  Italian stocks are trading off their lows, but still down 0.5%.  The BTP/Bund is trading at +294bp after trading above +300bp earlier.  The Hang Seng got hammered today (-2.45%) after local traders returned from a long weekend, and so there’s an air of “risk-off” tones in global markets this morning as well.  We think EURUSD may bounce off trend-line support in the 1.1510s today, but sellers remain in control sub 1.1570.  A large option expiry looms at the 1.1500 strike for tomorrow (1.3blnEUR).

• GBPUSD: Sterling broke trend-line support in the 1.3010s after EURUSD selling resumed in Europe today, and it’s been a one-way street down to the next support level in the 1.2940s ever since.  The UK Conservative Party conference continues today, with a speech from former UK foreign secretary, Boris Johnson, expected shortly.  Next support is 1.2860.  Resistance 1.3020-30.  The EURGBP cross has finally found some traction again, and has regained the 88 handle (which could be a drag on GBP here).

• AUDUSD: The Aussie is collapsing this morning after the RBA kept Australian interest rates on hold last night and reiterated concern over household spending and low wage growth (dovish as expected), but dropped their 2018 inflation forecast.  It’s hard to read into this minor change to the statement, but there was certainly nothing to suggest in the RBA’s communication that rates were going to rise any time soon.  Couple this with renewed selling in EURUSD today, and we have AUDUSD smashing through chart support in the 0.7210s, and then the 0.7180s.  Some Fibo support in the 0.7160s and a bounce in EURUSD into the NY open has helped some buyers come back in here now.  December copper is bucking the global “risk off” theme this morning, but we’re not quite sure why.  We think AUDUSD remains on the defensive sub the 0.7230s.  A large option expiry looms for the Aussie as well tomorrow, with 1.2blnAUD going off at 0.7190.

• USDJPY: Dollar/yen has pulled back a bit from yesterday’s NY highs as EURJPY leads a bit of a “risk-off” wave in European trade today.  The market has bounced off support in the 113.60s however as Italian markets calm down a bit, and EURUSD/EURJPY trade off their lows.  We think buyers remain in control above the 113.50-60 level and we still see a good probability of the November 2017 highs being tested (mid 114s).

Tune in @EBCTradeDesk for more real-time market coverage.

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About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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