US AM Digest: JPY and CHF Rise on Italian Political Woes

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US Market Snapshot via IG: DJIA -0.8%, Nasdaq 100 -0.9%, S&P 500 -0.7%

Major Headlines

  • Italian Political woes saw German-Italian 10yr bond spreads widen to 300bps
  • Italy’s Cottareli will present list of ministers later today

JPY, CHF: Flight to safety out of Italy has been the dominant factor this morning, which prompted a surge of buying in the Japanese Yen and Swiss Franc, while global bond yields have seen a sizeable sell off. A significant widening in German-Italian bonds spreads pushed EURJPY towards the lowest level since June 2017, eying 125, however strong support at the figure has led to some slight moderation in selling. EURCHF also briefly gave up the 1.15 handle, reaching lows of 1.1448.

EUR: Uncertainty surrounding Italian politics remain high, which will be the case for some time as Italy heads towards another election. This came after reports that the President would not approve a Eurosceptic (Savona) as the country’s finance/economy minister, while also designating Cottarelli (ex-IMF official) as PM after Conte gave up on efforts to form a government. A list of ministers is expected to be unveiled today by Cottarelli whereby it is likely that both the League and 5 Star will reject, making a snap election seemingly inevitable. Euro seeing loss of 0.5% today with 1.15 holding for now. Other interest for the Euro will be Friday’s No Confidence vote for PM Rajoy.

USD: The risk off environment has prompted the greenback to show characteristics of a safe haven currency with EUR and GBP selling leading to demand for the US Dollar. A brief move above 95 for the DXY, resistance ahead at 95.15, which marks the highs seen in October.

GBP: The broader risk tone and the rally in the US Dollar has pressured GBP, trading in the mid-1.32s having come off lows of 1.3205. GBPJPY found buying interest above 1.43 to curb further losses.

CAD: The bears are out for CAD ahead of the Bank of Canada meeting, with USDCAD edging towards resistance at 1.3040-50. Unlikely that the BoC will hike tomorrow with a probability of 17.15% for a 25bps hike. Potential for caution from the BoC given that a potential NAFTA agreement looks to be delayed, providing further uncertainty for the Canadian economy. Elsewhere, the recent pull back in oil prices have also kept the Loonie pressured.

DailyFX Economic Calendar: Monday, May 29, 2018 – North American Releases

DailyWebinar Calendar: Monday, May 29, 2018

IG Client Sentiment Index: EURJPY Chart of the Day

EURJPY: Data shows 47.7% of traders are net-long with the ratio of traders short to long at 1.09 to 1. The number of traders net-long is 2.3% lower than yesterday and 12.4% lower from last week, while the number of traders net-short is 2.2% higher than yesterday and 14.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURJPY prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURJPY-bullish contrarian trading bias.

Four Things Traders are Reading

  1. CoT: EUR/USD & Crude Oil Speculators Sell for Fifth Straight Weekby Paul Robinson, Market Analyst
  2. Trading Outlook for Crude Oil, Gold Price, S&P 500, DAX & More”by Paul Robinson, Market Analyst
  3. JPY Surges on Safe Haven Demand as Italy Sparks Widespread Panicby Justin McQueen, Market Analyst
  4. EURUSD Slumps as Italy Poses a Real EUR Risk” by Nick Cawley, Market Analyst

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— Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.comFollow Justin on Twitter @JMcQueenFX

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