We expected the Forex market to consolidate this week as major stock indexes pared last week's losses and gained a level of stability.
In fact, as the G-7 equity markets drift back above last week's lowest levels, the major Forex crosses have been contained to relatively narrow ranges.
We don't see this tranquillity in the currencies lasting much longer as the simmering budget debate between Italy and the EU progresses to a full boil.
Italy submitted its 2019 budget draft to Brussels at the 11th hour on Monday night. EC protocol gives the Commission two weeks to either accept it or reject it; early comments from EC officials make it apparent that it won't take that long.
The point of contention is clear and simple: Italy's coalition government plans to keep their campaign promises by increasing the nation's deficit to 2.4% of GDP, which is triple the 0.8% deficit the last government agreed to with the EC and the IMF.
The EC President, Jean-Claude Juncker, was quoted yesterday as saying that Italy's budget would trigger a "violent reaction" from other Eurozone nations if it was approved in its current form and that a 2.4% deficit is not "compatible" with the EU rules.
We've seen this type of fiscal battle in the Eurozone before with Greece and to a lesser extent Portugal, Ireland and Spain. And it has always led to the Euro currency trading lower.
It's been our experience that tracking the capital flight data is an accurate gauge of how intense the internal pressure is becoming and a way for Forex traders to set up short trades in the Euro crosses.
The most recent data shows that large depositors withdrew €70 billion out of Italian banks between June 1st and the end of August. We would expect this number to rise over the next few months with banks across the border in Switzerland the safest destination.
Since the capital outflow data aren't published every day, we will watch the 10-yr BTP yields as the budget standoff continues. As the depositors move money out of the country, we expect the BTP yields to rise and the Euro to fall. At this point, the spread between the BTPs and German Bunds is at a 6-year high of 330 basis points.
Our trade suggestion on Monday to sell EUR/USD at 1.1610 was filled, which lowers our average short price to 1.1650.
Our trade suggestion to add to short USD/JPY positions at 112.40 was filled. This lowers our average price to 113.10.
Our suggestion to sell GBP/USD at 1.3210 was filled on Tuesday.
Foreign exchange and derivatives trading carry a high level of risk. Before you decide to trade foreign exchange, we encourage you to consider your investment objectives, your risk tolerance and trading experience. It is possible to lose more than your initial investment, so do not invest money you cannot afford to lose. Seek advice from an independent financial or tax advisor if you have any questions. The FSG and PDS are available upon request. If there is any advice on this site, it is general advice only and has been prepared by Synergy Financial Markets Pty Ltd AFSL 403863. Synergy Financial Markets Pty Ltd has made every reasonable effort to ensure the information provided is correct, but Synergy Financial Markets Pty Ltd makes no representation nor any warranty as to whether the information is accurate, complete or up to date. To the extent permitted by law, Synergy Financial Markets Pty Ltd accepts no responsibility for any errors or misstatements, negligent or otherwise. The information provided may be based on assumptions or market conditions and may change without notice. Synergy Financial Markets Pty Ltd, its associates, officers or employees may also have interests in the financial products referred to in this information by acting in various roles. They may buy or sell the financial products as principal or agent and as such may effect transactions which are not consistent with any recommendations (if any in this information). Synergy Financial Markets Pty Ltd or its associates may also receive fees or brokerage for acting in the above capacities.