FUNDAMENTAL ANALYSIS

USD, EUR, GBP, JPY and AUD on the Outcome of the Italian Referendum

07 Dec 2016

USD (NEER) – After opening with a short-lived rise on the Asian markets on the outcome of the Italian referendum, the dollar began the week on the decline, slipping below last week’s lows. The upward thrust resulting from Trump’s election is over, for now.

Recent Fed speeches (Bullard, Evans and Dudley yesterday) expressed caution on the possibility of rates rising more next year on a markedly more expansionary fiscal policy, both because there are still not details on the measures that will effectively be announced, and because the impact on 2017 could be reduced. For the time being, therefore, the upswing of rates/yields, and therefore of the dollar, should take a breather.

The non-manufacturing ISM came in much stronger than expected, but was outbalanced, as was also the case with other positive data releases last week, by profit-taking, which caused the dollar to retrace. This week, therefore, the US currency should stabilise, staying below the highs hit last week.

EUR – After correcting briefly to EUR/USD 1.0506 on the outcome of the Italian referendum, the euro recovered swiftly, rising to just short of EUR/USD 1.0800, revisiting levels abandoned three weeks ago.

Monday's data provided positive indications, with retail sales beating expectations and the PMIs down marginally compared to the advance reading, but up compared to the previous month and at their highest since December 2015. The ongoing improvement, albeit modest, of the growth picture in the euro area, is strengthening expectations for the injection of monetary stimulus at next Thursday’s ECB meeting to be the last in the extended, present expansionary cycle. Therefore, the chances of the euro hitting new lows below the EUR/USD 1.05 mark would seem to be limited, although downside risks continue to prevail.

GBP – Sterling opened the week on the rise, consolidating in the GBP/USD 1.27 area, supported by an excellent services PMI, which beat expectations and returned to the highs abandoned in January. Against the euro, the pound’s trend was more mixed. After rising significantly on the outcome of the Italian referendum, and stopping just short of EUR/GBP

0.8300, it then corrected, dropping to beyond EUR/GBP 0.8450 on the rebound of the EUR/USD once the referendum effect was reabsorbed.

If the positive indications from industrial output data are not disappointed, the pound should continue to strengthen, all the more so if the Supreme Court upholds the High Court’s ruling by which the government cannot activate the Brexit process without Parliament’s prior approval. The ruling is expected any time starting on Thursday.

JPY – After strengthening briefly on the outcome of the Italian referendum, the yen resumed its decline, although it did not drop beyond last week’s lows, with the exchange rate forming a double top at USD/JPY 114.78-114.83.

The resistances in the USD/JPY 115 area should prove resilient, at least for now, although risks are skewed to the downside for the yen. Last week, the first short yen positioning was recorded on the speculative market since the beginning of January.

AUD – As unanimously expected, the Reserve Bank of Australia left interest rates unchanged at 1.50%. The exchange rate did not to react, both because the decision was expected, and because the central bank essentially reasserted the considerations made last month.

On the exchange rate in particular, the RBA repeated that an appreciation could complicate the adjustment process of the economy, currently under way. As a whole, some signs of an improvement, albeit modest, are emerging: the picture of the Chinese economy has stabilised, the inflation outlook at the global level is more balanced, and commodity prices have increased.

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