Perennial political survivor Silvio Berlusconi’s machinations this weekend in Italy managed to reawaken the EU systemic risk trade as we look ahead to a week full of big event risks, starting with a speech by Japanese prime minister Shinzo Abe speech tomorrow morning and then Wednesday’s European Central Bank meeting.
We’ve already avoided the Boring Monday syndrome this week with events over the weekend conspiring to make the week’s opening an interesting one. First, we had Berlusconi asking ministers to resign from the government in the hope that this will result in a new Italian election. It appears some in his party are reluctant to do his bidding, and Letta is trying to make a stand, with a possible confidence vote on the government set for Wednesday, the same day as the ECB meeting.
In the US, the government shut-down risk has been dramatically raised with the events through this weekend, though the New York Times points out the many ways that the situation can develop from here and a deal could be struck on the budget today. The debt ceiling issue will nevertheless continue in the coming weeks. My expectation is that we may risk a few days of official shutdown at most, but it all ends up mostly being a bunch of posturing for the sake of 2014 mid-term elections and the 2016 election.
Looking ahead
Australia’s central bank is on tap tonight as the Aussie has slipped lower, though without developing much momentum. The Reserve Bank of Australia has been content to talk the Aussie down and may continue to do what it can to remain on the dovish side of expectations without any dramatic update to its rate expectations likely, however. With risk off and the JPY moving higher, the risks are tilted to a further dive back lower for AUDUSD unless those conditions reverse.
The 0.9250/25 area looks like the pivot zone for a move back toward 0.9000, if it manages to slice through this zone in the days ahead. The September China HSBC manufacturing PMI was a disappointment relative to expectations at barely above 50. We have the official manufacturing PMI out tonight in China, though the market may be taking official data with a grain of salt these days.
Watch out for a key speech from Abe in Japan on Tuesday (set for 0900 GMT, so during the European trading session), which could address the future of the corporate income tax, sales tax, and a possible stimulus. See my post from Friday on USDJPY, and what to look for in terms of market reactions. The stakes have risen for this speech as the JPY has shown its old “safe-haven” behaviour, or at least its short-term negative correlation with risk appetite with this week’s open. USDJPY was briefly through the major trendline support overnight.
Chart: EURJPY
EURJPY has now more thoroughly rejected the recent attempt at new highs. With the ECB up this week and a speech from Abe up tonight, we could see fireworks, with the technical risk opening up to the downside now after the false break higher. The 132.50 area is resistance and the support comes in at the trendline and Ichimoku daily cloud levels.
