Renzi quits after losing the referendum.  EUR/USD heading towards 22-month low, will it break 1.05?

Italy held its referendum over the weekend.  Italy’s Prime Minister Matteo Renzi proposed constitutional changes, but the Italians voted against it by 60% to 40%.  Renzi quits at the start of the week to fulfil his promise made before the referendum.  Trump’s victory had given a boost to populist movement around the world and Renzi became the first victim.  There will be uncertainties looming in the Eurozone until a new prime minister is installed.  One possible scenario is an early election, followed by an “Itexit” referendum.  We are already seeing a possible “Frexit” scenario in next year’s French presidential election.  France and Italy are the second and third largest economy in Eurozone.  A slight hint of possible exit from either of them is enough to put pressure on the Euro.  It is no surprise to see EUR/USD opening lower at the start of the week and heading to its 22-month low.  If the 1.05 key support loses its foothold, we could see EUR/USD head towards parity or even lower.

ECB is scheduled to make its monetary policy announcement later this week.  We do not foresee ECB to make any changes, however, it would be interesting to find out what Mario Draghi has to say during the press conference and how is he going to overcome economic challenges and mitigate political risks. 

US prelim GDP outperformed, it came in at 3.2% versus consensus of 3.0%.  ADP non-farm payroll also outperformed the consensus by more than 50K, came in at 216K.  By then, market was certain of a rate hike on the 14th December and expected the official non-farm payroll on Friday to outperform as well.  The actual non-farm payroll came in close to forecast at 178K, unemployment rate dropped from 4.9% to 4.6%, but the average earnings shrank by 0.1%.  The numbers did not alter the December rate hike expectation, but market scaled back on the possibilities of the next rate hike in the first half of 2017.  We do not foresee this week’s ISM non-manufacturing PMI, unemployment claims and consumer sentiment to have major impact on the dollar.  Investors are likely to wait for FOMC’s rate hike guidance for 2017 in next week’s announcement.

OPEC has managed to deliver a deal exceeding investors’ expectation.  They will cut production by 1.2 million barrels a day.  The biggest surprise to us is the special exemption given to Iran to keep raising production.  Russia also pledged to cut as much as 300,000 barrels a day.  It wiped clean all the disagreements between peers throughout the year in one meeting.  WTI celebrated, hitting $52 a barrel once again.


Our Picks

EUR/USD – Slightly bullish.  EUR/USD is heading to the key support of 1.05.  We expect Mario Draghi to maintain his optimism in the outlook this Thursday, which could bring about a short-term relief rally.



USD/CAD – Slightly bearish.  With the OPEC deal finalised, Bank of Canada is likely to maintain its optimism this week.  We expect the Loonie to outmuscle the greenback this week.



OIL/USD (WTI) – Range bound.  The OPEC deal is sealed.  We expect WTI to be range bound unless there is further catalyst to boost the price beyond $52 a barrel.



Top News This Week (GMT+8 time zone)

Australia: Cash Rate.  Tuesday 6th December, 11.30am.

We expect figures to remain unchanged at 1.5% (previous figure was 1.5%).

Canada: Overnight Rate.  Wednesday 7th December, 11pm.

We expect figures to remain unchanged at 0.5% (previous figure was 0.5%).

Europe: Minimum Bid Rate.  Thursday 8th December, 8.45pm.

We expect figures to remain unchanged at 0.0% (previous figure was 0.0%).



Fullerton Markets Research Team

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