FX market outlook

FX market outlook

Posted on Monday, December 5 2016 at 8:51 am GMT+0000

Euro plunges to 20-month low in reaction to Italian referendum No vote.


The euro plunged against the US dollar to reach its lowest level in 20-months after news that a referendum on constitutional change in Italyon Sunday resulted in a “no” vote. This prompted Prime Minister Matteo Renzi to announce his resignation.

The referendum was also seen as a vote of confidence for Renzi and after suffering a crushing defeat this weekend, his resignation brings political uncertainty to one of the Eurozone’s largest economies. The rejection of the proposal for constitutional reforms creates uncertainty for the fragile Italian banking sector.

The euro dropped to as low as $1.0505, the lowest since March 2015 after the news. The currency opened in Asia at $1.0661. Against the yen, the euro fell by over 2% to 118.72 yen. A bigger fall in the euro was unlikely since the referendum outcome was expected. Meanwhile, the outcome of elections in Austria helped allay concerns of political uncertainty in the country. Austria rejected a far-right candidate in a presidential election over the weekend.

All eyes are now on the ECB meeting later this week to see what the Bank’s reaction would be to the news of the Italian referendum and much also depends on the performance of bonds, particularly Italian government bonds. If ECB President Mario Draghi extends bond buying, this would help support Italian bonds and would be beneficial for the euro.

The diverging monetary policies of the ECB and the Federal Reserve and rising US Treasury yields have been factors supporting the US dollar. The greenback bounced off session lows of 112.86 yen to jump to a high of 113.85 yen in Asian trading and trimmed losses made on Friday after US nonfarm payrolls data. The dollar had slipped after the jobs report showed disappointing wage earnings but overall the report was positive as job creation beat forecasts and the unemployment rate fell to a 9-year low. The payroll report was seen as strong enough not to change market expectations of a rate hike by the Fed this month.

Today there was news of another resignation, in New Zealand, where Prime Minister John Keys announced he is leaving his post after 8 years. The New Zealand dollar weakened on the news but then stabilized. The kiwi fell almost 1% against the greenback to touch a session low of  $0.7068 before bouncing to $0.7108 as markets do not see any changes to fiscal-monetary policies since Deputy PM Bill English is considered to be taking over leadership.

In terms of economic data, the November Caixin services PMI for China was released today. The index rose to 53.1, the highest since July 2015, up from October’s 52.4.

Meanwhile, services PMI Data later in the day are due from the Eurozone, the UK and the US.

In commodities, oil prices consolidated near the highs reached last week after a strong performance following OPEC’s decision to cut crude output at a meeting last Wednesday. WTI oil remained above the $51 a barrel level while Brent crude climbed close to the $54 a barrel level.

Gold prices were steady around $1175 an ounce. The precious metal briefly spiked to $1187.91 early in the Asian session due to risk aversion after news of the Italian referendum result.