By Stephen Innes
Italian politics dominated overnight as the geographical divide between northern Europe wealth and Southern Europe economic struggles play out in the emotionally charged Italian political front. And the euro is the ultimate pawn trapped between an open and free European market versus the growing waves of national inspired populism that is once again threatening contagion around the Mediterranean. Italy is plummeting into a political crisis.
Yesterday's EUR relief rally quickly gave way to the possibility of another election in Italy. But the significant risk facing the markets is will Italy be another Spain or morph into another Greece?
Things appear to be moving in a positive tangent in North Korea, and given all the noise this ruckus has created over the past fortnight, global markets are happy to see this summit happen. $Asia traded lower across the board yesterday with KRW/IDR/INR in the lead on improving geopolitical risk and favourable EM high yield scrim. But with the USD reasserting itself overnight vs. the EUR as Italian risk crumbles, the market has pulled back on some of the stretched positionings as the US dollar continues to show a strong haven backbone in the G-10 space.
Sticking with the political theme, The Malaysian ringgit continues to be a no-trade zone despite decent levels. Even more telling, however, was yesterday when regional sentiment was improving with USDAsia moving lower, and Indonesia /India yields also correcting lower, but the ringgit remained stuck in no man's land on little more than trickles of offshore flow.
Oil prices are falling fast and furious as WTI has plummeted nearly 10% of its peaks, as Saudi Arabia continues to make overtones that Russia and OPEC nations will pump more oil to ease global supply concerns. While all roads are pointing to OPEC raising production, the real question is by how much. Fine-tuning the supply calculus is a prudent move given that no one would benefit from a spike to $90+ per barrel. But this should not be confused with a breakdown on OPEC compliance, or should it?
On the other hand, the technical trading overlays are looking quite bearish as the aggressive sell-off is suggesting a significant top if forming on the uber-bearish reversal.
Conflicting signals abound with Italy contagion fears back on the forefront offset by the rising US dollar which remains the primary headwind for gold price. But we have a hectic week to navigate, chalk full of crucial US data none more significant than the May employment report, particularly considering the recent dovish conversation on wage growth in the May 2 FOMC minutes. While the market can agree and disagree on the importance of the geopolitical narratives, what's not debatable will be the US NFP data which could shape up the near-term outlook for the US dollar and gold prices in general.
Certainly, geopolitical risk will point to upside risk, but with the US dollar trade firm and attracting EU risk-off flows, geo-risk won't be a significant game changer until the USD weakens.
EUR: EURUSD continues to buckle on haven USD flows given the heightened Italian political risk, while near-term growth dynamics based on the recent run of weak economic data in the EU are also providing tailwinds for the USD.
JPY: The Nikkei dynamics look fragile in the face of trade issues, and this continues to weigh on USDJPY sentiment. Also, the JPY is attracting EUR haven flows. Despite Abe's support waning, risk rewards below 109 do not paint a convincing argument suggesting more of the same range trade within the 109 handle.
MYR: The ringgit is putting in a repeat performance from last week so far as investors remain extremely cautious with the evolving political landscape.
KRW: USDKRW longs to unwind yesterday in consort with improving geopolitical risk, but undoubtedly month-end exporter flow was a driver with the KOSPI up marginally on muted different stream.
High yielders are trading positively on the backdrop of lower US 10-year yields.
IDR: Central Bank commitment to monetary policy is making compelling waves in both currency and bond markets. A move designed to get ahead of the Fed curve.
INR: The reversal in oil prices is the primary driver for improving sentiment.
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