EUR: Italy referendum reaction is not clear-cut, beware of seasonal FX bias - MUFG
|Derek Halpenny, European Head of GMR at MUFG, suggests that the big event for the markets going into the weekend is the Italian referendum on Sunday and the Austrian presidential election is also being rerun but doesn’t hold the same attention as the referendum.
Key Quotes
“Certainly though, if Norbert Hofer of the Freedom Party wins in Austria it will reinforce the negative sentiment that would be associated with a ‘No’ vote in Italy.”
“But we are somewhat wary of the assumption that the euro will fall notably on a ‘No’ vote in Italy. The Italian bond market reaction will be one key bellwether to sentiment and of course the ECB may well actively support the market and will surely do what it can to limit financial market volatility. The ECB has repeated recently that it will continue to play a key role in anchoring stability in financial markets. Secondly, the broader reason for general dollar strength – the Trump reflation trade – looks to be fading somewhat.”
“The DXY index is still up 3.8% from the November low just before the election but has now corrected by 1.2% from the recent high. Thirdly, as we enter the final month of the year it is worth highlighting the strong seasonal bias in favour of the euro versus the dollar. Taking 20yrs of trading, the final 4-5 weeks of the year show a very strong gain on average for EUR/USD. There is debate over the reason for this, but it may be more a dollar phenomenon rather than euro specifically with corporations with dollar receivables exposure more actively hedging in preparation for the new calendar year ahead.”
“It is also worth mentioning that a surprise ‘Yes’ vote on Sunday isn’t necessarily wholly positive and is a double-edged sword to some degree. The strengthening of power to the lower house of parliament at the expense of the Senate may ultimately help 5 Star Movement if they manage to win the general election expected in 2018.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.