- Berlusconi promise to resign; markets give one cheer but pressure unlikely to come off BTPs
In the wake of the approval of the 2010 Italian budget report but without a majority of Italian MPs supporting the motion due to the number of abstentions, the euro bounced after President Napolitano announced that PM Berlusconi has offered to resign following the passage of the austerity and reform measures agreed as part at the Oct 27th EU summit. While doing little to provide clarity on how Italian politics will proceed from here and whether the prospects have improved for enactment and implementation of the reforms that would mark a sea-change in investors’ enthusiasm for holding Italian debt, the news was at least seen to have minimised the immediate tail-risk scenario of a dissolution of parliament and early elections with the reform bill in abeyance until such time as a new government can be formed. Mr Berlusconi’s public opinion after his meeting with Pres. Napolitano was that elections are the only way forward; but markets can keep their fingers crossed hoping that a technocratic government with all-party support may yet be formed. While yesterday’s political news may be good enough to help sustain yesterday’s move up in the euro and related modest bounce in risk appetite evident in other asset classes, it is most unlikely to bring much relief to the Italian bond market. Even if the ECB is seen to be becoming more aggressive in its purchases (and so far it is not) this may simply increase the pace at which banks are unloading their holdings of assets no longer deemed risk-free by their regulators. This should keep gains limited, with plenty of inclination to fade the latest rally.
- China CPI due; indications of ‘selective easing’ in credit support our commodity currency view
Wednesday’s sees the October China data-slate off kicks off with CPI (dates for the activity readings on industrial production, retail sales and investment could come as early as today but unconfirmed). Amid indications from our China analysts that that the ‘selective easing’ we have long talked about and which would ensure a ready supply of credit for investment/infrastructure spending is coming to pass, we remain constructive on prospects for Chinese demand for resources holding up commodity currencies. We continue to see USDCNY lower which feeds directly into a bullish AUDUSD view (see chart) but we have a slight preference for CAD over AUD until we see whether the RBA is going to cut rates again at the beginning of December. Reaffirmation of the BoC’s 2% inflation target Tuesday at the margin helps the cause of CAD, coming against background chatter of some shift in its remit that would have imparted a somewhat stronger bias to lower rates. At the same time, we need to acknowledge the concerns expressed by BoC Governor Carney in his capacity as the new chairman of the Financial Stability that a global liquidity shock with effects on the (global) real economy could soon become evident as a result of the ongoing eurozone crisis.
- M&A hope for USDJPY but still moribund; Riksbank minutes due
The involvement of Softbank in a potential bid for Yahoo (market cap. $19.89bn) might resonate in the Tokyo session with some pro-USDJPY impact but amid some signs BoJ may be starting to sterilise its recent intervention, we remain a better seller of USDJPY. In Europe, Riskbank minutes are due and if dovish might strengthen support for NOK in the 1.1650 area, all the more so if the latest gain in oil prices holds or extends.
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BNP Paribas
Corporate & Investment Banking