Markets brace for Italian referendum this weekend

• Pound surged to an eight week high against the Dollar
• Federal Reserve likely to raise rates 
• GBP-AUD recovers to levels not seen since September

US job data is the next focus for today before all eyes turn to the Italian referendum. Job growth has been relatively mild over the past few months but the Federal Reserve continues to talk up the improvements in the labour market. The Non-Farm Payroll (NFP) report is expected to grow 170k in November. Jobless claims have been low, confidence is at a 9 year high, according to the conference board report and the precursor to Non-Farm Payroll, the Automatic Data Processing (ADP) report, yesterday showed solid growth of 216k in private sector jobs, up from prior month's 119k. Judging from recent US data, NFPs are expected to be a solid report, with room for an upside surprise.

The December Federal Reserve interest rate hike is viewed as a done deal and the market is looking beyond that. Fed fund futures are pricing in more than a 50% chance of another hike by June. So, between the prospect of tighter monetary policy and looser fiscal policy, the USD is likely to stay buoyant in 2017.

This weekend, the Italian people will be voting on proposed constitutional reforms. These reforms would strip the local government and senate of much of their power and would strengthen the leadership of Prime Minister Matteo Renzi, which would been seen by the market as pro-growth. Matteo Renzi has said he will resign if the proposals are rejected in this weekend’s vote. This could be followed by new elections, which could in turn benefit the Five Star Movement, an anti-euro group led by the former comedian Beppe Grillo.

The Movement is one of many protest parties that have surged in popularity across Europe in recent years. But, behind the politics in Italy there's a background of persistent economic weakness and a more immediate problem in the banking industry not helped by Italy's dismal economic performance as it is roughly the same size as it was at the turn of the century. There are real concerns that a defeat for Mr Renzi's proposals could tip already failing Italian banks to the brink of collapse, or worse.

The Pound surged to an eight week high against the Dollar and near a three month high against the Euro, after the Brexit minister David Davis hinted that the UK would consider making payments to the EU budget in return for access to the EU single market – spurring hopes of a softer Brexit.  
 

Italian Constitutional Referendum

Sunday 4th December 2016

06:00 GMT - Polls Open

Turnout updates expected at 11:00 GMT, 17:00 GMT

No exit polls before 22:00 GMT

22:00 GMT - Polls Close

Monday 5th December 2016

00:00 GMT - First partial results expected

 Final result unlikely before 03:00 GMT 

  
Austrian Presidential Election

 
Sunday 4th December 2016

6:00 GMT - Polls Open

16:00 GMT - Polls Close

19:00 GMT - First partial results

No final result before absentee votes counted on 

GBPAUD

Sterling’s recovery in the last week or so has taken place whilst nervousness has been expressed over the Chinese economy and that has helped the Sterling–Australian Dollar rate to recover to levels not seen since September. The deal struck by the oil producers (OPEC) has allowed the US Dollar to weaken a tad as well and that generally takes the Australian Dollar along for the ride. So, having bottomed out in the mid 1.50s just 6 weeks ago, the GBP-AUD exchange rate is now pushing up to A$1.71 and may make it as far as A$1.74 before it hits trendline resistance. That would also mark the same high as the one we saw in August. A break of that upper level would open up a possible push to A$1.80 and Aussie Dollar buyers all around the globe would be very happy with that. The caveat is if the Pound fails to follow through – and there is always a chance that might occur – then a drop back to 1.65 is highly likely. 

GBPCAD

The energy deal that strengthens the price of oil and energy products has a double edged sword effect on the Canadian Dollar. Higher oil prices will help Canada’s income from exports of energy products, but the Canadian Dollar does move in line with the US Dollar to some degree and a stronger commodity price tends to weaken the USD. Commodities are traded in USD, so the stronger the asset, the weaker the currency can be. So, the effect on the Loonie isn’t as apparent as it might be. Nonetheless, the strength of the Pound after strong UK data has allowed the GBP-CAD exchange rate to climb. At the beginning of October, this pair was trading down at C$1.56, but is testing towards C$1.70 at the time of writing. It is pressing a resistance level at this point, but a break to higher levels will see C$1.72 tested and a really solid level of CAD buying interest will be seen at C$1.75 or thereabouts. If Sterling fails to make further advances, then a drop back to somewhere between C$1.63 and C$1.65 is almost inevitable.

GBPEUR

We appear to be witnessing a sea change in the GBP-EUR rate at the moment. The strife in Italy and Austria is causing a lot of concern. There is talk of a banking crisis in Italy if the constitutional referendum receives a NO vote. There is consternation that a far right party may gain ground in Austria and that would be a very anti-EU development. So the posturing from EU leaders might start to look a little hollow if the weekend’s events do go the EU’s way.  Meanwhile, the UK economy – which, if you remember, was forecast to inevitably collapse if Brits voted to leave the EU – has fared rather well in spite of all the doom and gloom. So, we are seeing a worthy recovery in the value of the Pound and Sterling has battled its way back to levels not seen since September. In fact, the Pound has broken a long term trendline which capped it at 1.1650 up until now. That leaves room for a test of 1.20 in the next few weeks and, if the Pound can push above that level, it will have achieved its best result since June. We are in a very lively market, so nothing can be ruled out. 

EURUSD

I have used a long term EUR-USD chart to show the narrow range that this pair has inhabited for the last two years. The range has capped this pair at $1.15 and supported it at $1.05 or thereabouts. At the moment, concerns over the Italian and Austrian events is keeping the Euro on the back foot, but the rebound in oil prices has also weakened the USD. So, the status quo is maintained to some degree. However, we are at the lower end of this range and just below the long term support line. It wouldn’t take a lot to see the Euro slide to parity with the US Dollar and a NO vote in Italy might be just the catalyst to make that happen. We wait with breath abated. 

GBPNZD

There is a flatline in the GBP-NZD chart at NZ$1.77 and that has capped this pair since October. The market has been down to NZ$1.65 in the meantime, although that was considered a ‘fat fingers’ moment by a large volume trader, who skewed the market. So, with the Royal Bank of New Zealand (RBNZ) pretty clearly keen to weaken the NZ Dollar, there is scope for the GBP-NZD rate to push higher. However, the NZ interest rate cut, delivered on 9thNovember, hasn’t really weakened the NZ Dollar in its own right. Sterling’s strength against the NZD is on a par with its gains elsewhere. So, for the upward momentum in this exchange rate to be continued, we will need to see further Sterling strength. That is perfectly possible but the GBP-NZD rate is looking very overbought at this 1.77 level and it will take a catalyst of some description to shunt it towards the 1.80 level. 

GBPUSD

The Pound is back in the channel that it occupied against the US Dollar since early 2014. That is a downtrend, as you can, see but Sterling dipped out of this channel in June after the Brexit vote and is now just about back on the high side of the channel bottom. Sterling has regained its place above the $1.2250 channel bottom, partly due to the remarkably buoyant UK economic data and partly due to the recovery in oil prices, which weakened the US Dollar. The indicators would suggest we might see further gains in this pair but, there is a threat of higher US interest rates on the 14th December and traders will be wary of the Federal Reserve pulling the trigger on that. So I would hazard a guess that Sterling will move up to the high 1.20s but remain below $1.30 for the time being. If, however, the Federal Reserve fails to hike the US base interest rate on 14th Dec, the GBP-USD rate could well be heading for the upper end of this range and that can be seen at $1.35. It looks a long way off right now, though.