Italian jittersBy Arnaud Masset
The USD rose on Wednesday amid nervousness about Italy’s government. The dollar index surged 0.35% to 93.975 as the euro dipped 0.57% to 1.1711. Pound sterling slid 0.35%, while the loonie gave up 0.50% with USD/CAD increasing to 1.2882. Safe haven currencies were better bid, as both the Japanese yen and the Swiss franc extended gains. USD/CHF slid as low as 0.9895, while USD/JPY returned towards 110.
Everybody is waiting for Italian President Sergio Mattarella to approve Giuseppe Conte as Prime Minister. Conte is mostly unknown, has no political experience and is therefore unpredictable: markets like predictability. The president’s pause suggests he is not convinced Conte fits the job. If Mattarella refuses to appoint Conte, the coalition 5-Star/League would have to propose someone with a political base and a political background. The coalition won’t give up, should Conte be turned aside, so uncertainty could last. The coalition wants to get on with filling its campaign promises: slash taxes, boost spending, roll back pensions, control immigration and a European Central Bank debt write-off.
Strong yenBy Peter Rosenstreich
JPY is gaining on risk-averse trading. USD/JPY has fallen sharply to 109.90 from 110.95. Outside of macro risk, there are weak Japanese economic fundamentals. The inflation slowdown is clearly disappointing for the Bank of Japan. Core inflation is well below 1%, lowest in the G10. But even a weaker JPY is unlikely to generate meaningful inflation: the BoJ will need to lowers its inflation forecast again, because it’s unlikely the bank will meet its 2% target. Deceleration of its focus on normalisation and a lagging EUR suggest a constructive trade on long EUR/JPY.