Italy And Markets - Currency Market Intervention?

| About: SPDR Gold (GLD)
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Italy follows the U.K. and the U.S.

Austria stays the course.

Market reaction: no big deal?

Globalism suffers a blow in 2016.

The dollar suffers a key reversal - a short-term issue?

2016 has been a year of surprises. In June, the exit vote on the Brexit referendum shocked markets around the globe. Equities fell while precious metals exploded to the year's highs. The polls were wrong and markets reacted with shock and fear. However, in the weeks that followed, precious metal prices moved off their highs and equities bounced back. Meanwhile, in July bond prices in the U.S. began to fall signaling that interest rates were prepared to increase after a long and protracted bull market in debt instruments.

On November 8, the United States election defied the pollsters once again as President-elect Donald J. Trump captured more than enough electoral college votes to defeat the favorite in the election, Hillary Clinton. The kneejerk reaction, on election night, was selling in equities and buying in precious metals. Unlike the reaction that followed Brexit, the market corrected in a matter of hours. Precious metals fell precipitously and equities have rallied to new and record highs.

On November 30, the international oil cartel, OPEC, did something few expected as they agreed to cut petroleum output for the first time in eight years. 2016 has been a year of surprises and now the market is learning to expect the unexpected. Perhaps that is why the reaction to the Italian referendum was much different than it was when the United Kingdom rejected the status quo and populists rejected Italian reforms and the sitting Prime Minister.

Italy follows the U.K. and U.S.

On Sunday, December 4 Italy followed the trend established in the U.K. and U.S. when it voted no on a constitutional referendum to reign in power of the Senate. The Prime Minister, Matteo Renzi, campaigned hard for the initiative and put his reputation and job on the line. Unlike the close contest in the U.K. and the nail-biting Presidential contest in the U.S., the Italian people voted overwhelmingly against the referendum with the final vote at 40% for and 60% against the initiative. Following the referendum, Renzi became the second European leader to be unseated by a populist wave that toppled British Prime Minister David Cameron and put Donald Trump in the White House. The vote was the second blow to the European Union this year and with elections in France and Germany coming in the months ahead; it may not be the last. Meanwhile, last Sunday was also Election Day in Austria but the vote turned out differently in that E.U. member nation.

Austria stays the course

In Austria, Alexander Van der Bellen a Green-Party economics professor defeated Norbert Hofer of the Freedom Party by a margin of 51.7% to 48.3%. Hofer lost the close contest after campaigning on an anti-immigration nationalist platform. In Austria, the vote was a much-needed but slim victory for the European Union.

The election in Austria was for a largely ceremonial position as President while in Italy the no vote was a direct rejection of the E.U. It is likely that the Five Star Movement which favors an exit from Europe and the euro. Many analysts believe that a no vote in Italy would sow the seeds of further economic travails in Europe and the kneejerk reaction in the euro was negative.

Market reaction- No big deal?

Immediate market reaction following the no vote in Italy was a gap down in the euro versus the dollar. Source: CQG

As the ten-minute chart of the euro-dollar relationship shows, it the currency closed last Friday at $1.06710 and opened in the wake of the Italian vote at $1.0550 spiking down to lows of $1.0510 within the first 20 minutes of trading. However, the market seems like it is becoming accustomed to populist victories around the world these days. Source: CQG

The daily chart of the euro shows that the market shrugged off all of the worries about the Italian economy and rallied to highs of $1.0820 Monday, closing the session at $1.0770 near the highs. The euro currency put in a bullish key reversal on the daily chart on Monday following an event many market analysts believed would be very bearish for the pan-European currency.

Meanwhile, in the immediate wake of the Italian vote, gold attempted to rally just like it did after the Brexit referendum and Presidential election in the U.S. Source: CQG

Gold rallied sharply to $1190.20 on Sunday night but then proceeded to give up all gains, falling to a new low of $1158.60 during Monday's trading session which was the lowest price since early February. Source: CQG

At the same time, the dollar index moved lower as the euro recovered and put in a bearish key reversal trading pattern on the daily chart. Despite the turnaround in the dollar, the bearish technical trading pattern and a close at 100.112 which is below technical support at 100.60, gold could not close higher on the trading sessions. While there may be a rally in the gold later this week in response to the weak performance of the U.S. currency, gold's inability to recover is telling. Last December gold put in a multiyear low at $1046 and it looks like the yellow metal is attempting to do the same exactly one year later.

It is possible that the central banks, monetary authorities and treasuries of the world intervened in the currency markets in the interest of stability but gold had absolutely none of that. The action in gold tells us that interest rates in the United States are going higher and the dollar is still in bull mode. Moreover, the markets are becoming accustomed to populist victories and instead of surprises they are becoming the norm.

Globalism suffers a blow in 2016

The United Kingdom, the United States and now Italy have voted against globalism in June. While the votes were close in the U.K. and U.S. (as well as in Austria), the voters have spoken and have rejected the status quo. Last week, President Hollande of France announced he would not stand for reelection, perhaps because of an acknowledgment of the wave of nationalism sweeping across the Western world. In Germany, Chancellor Merkel will run for another term and that is likely to be a closely watched and market moving election in 2017. At this point the German Chancellor's reelection would come as a surprise given the trend seen since June.

Globalism is suffering a populist revolt. In the U.S. President-elect Trump won because of a rejection of politics as usual. In Europe, where the E.U. has attempted to meld not only currencies but culture, the process has run into problems as lethargic economic conditions and the flow of immigrants from Syria, Iraq and North Africa has diluted the economy.

Meanwhile, the result of the Italian referendum mirrors the reaction of the U.S. to the Presidential contest one month ago. The market initially moved in the direction that conventional wisdom would dictate. However, it turned around in another sell the rumor and buy the fact move that took the euro currency higher and the dollar lower.

The dollar suffers a key reversal- a short term issue?

The move in currency markets on Monday smelled to me of intervention. Source: CQG

The dollar index seemed to prepare for the no vote in Italy last Friday when it traded unusually high volume of almost 103,000 contracts on the December dollar index futures contract. The amount of trading in the currency markets was massive. On Monday, the same amount of volume traded and the bearish key reversal in the dollar and bullish one in the euro appears to be a move that central banks may have engineered.

Gold did not react to the bearish move in the dollar and while it recovered from session lows, it still posted a loss on the session where the dollar fell below support, how odd? Keep an eye on gold in coming sessions as it could be telling us that central banks and monetary authorities are doing everything they can to stop the rise of the greenback. After all, in one week the chances are that the Fed will hike interest rates by 25 basis points further exacerbating the interest rate differential between the dollar and euro.

Italy has kept the wave of populist victories going in Europe and just around the corner in 2017 French and German voters will get their chance to speak. Gold's lack of luster on Monday is a sign that the euro recovered and the dollar dipped in a highly manipulative move. Stay tuned…

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