Italian ignorance, crude knowledgeBy Peter Rosenstreich
Political risk is building in Italy, and markets are ignoring it. Yield spreads failed to react to news that the Northern League and 5-Star parties have reached a tentative coalition. This might have dramatic implications for Italian government spending: but the Euro continues to firm against the USD. Industrial metals such as copper and iron ore are threating to break higher, indicating renewed risk appetite.
President Trump’s decision to withdraw from the Iranian nuclear deal, JCPOA, is a major geopolitical shift, and it is moving oil prices above $77/barrel for the first time since 2014. Analysts are raising price forecasts for 2018. Oil companies will profit. Valuations have lagged oil prices due to scepticism over a diminishing supply glut: the removal of Iranian oil will end that. Oily currencies such as CAD, NOK and AUD will strengthen.
Cold Turkey
By Vincent-Frédéric Mivelaz
We expect the USD/TRY to maintain its strength, as long as Turkey stays out of the US-Iran nuclear flap and the Central Bank of Turkey remains inactive in monetary policy. Turkey’s current account balance deficit of USD -4.81 billion (prior: -4.52 billion) continues to expand, as goods trade (USD -4.6 billion) and employee compensation (USD -1.31 billion, at 3-years low) sag. On the other hand, services (USD +1.12 billion) continue to support the current account balance. Currently trading at 4.32, USD/TRY is regaining strength following recent declines, heading to the 4.35 range in the short-term.
By withdrawing from the Iran deal last Tuesday, the USA has caused further uncertainty in the Middle East. Diplomatic confrontation between Israel and Iran keeps on tightening. The Iran deal is in danger, though European effort to maintain it could worsen its relationship with the US.
NZD keeps falling, despite USD pullbackBy Arnaud Masset
The New Zealand dollar was one of the few G10 currencies to lose ground against the greenback, as speculators scaled down bullish bets. Speculators trimmed long Kiwi positions significantly last week, net longs fell to 12,546 contracts from 16,573 a week earlier - this is a decrease from 44% of total open interest to around 25%.
The last four weeks were rough for the New Zealand dollar. It gave up more than 6.5% against the buck to reach a multi-month low at $0.6903 on 10 May, amid widening interest differentials and a cautious central bank. However, the debasement has stopped for now with NZD/USD climbing back to $0.6950. On the downside, the currency pair is approaching a key technical support area at between $0.6869 (50% Fibonacci on March 2009- September 2011 rally) and $0.6781 (low from November 2017). Despite the solid debasement of the last few weeks, we think that sellers are not exhausted yet. Speculators are still net long on the Kiwi and may continue to unwind long positions.