– Italian political developments should not de-rail a EURUSD rally
Elsewhere in Eurozone over the week ahead Italian politics will again be in focus. As expected, the Italian President Napolitano has given the task of forming a new government to the leader of the center-left Pierluigi Bersani. Negotiations will be difficult, but we do not expect Italian politics to weigh substantially on the EUR. Our European economists suggest that the most likely and the least unstable scenario is a grand-coalition between Bersani and Berlusconi. Should no government be formed in the coming days (most likely by Tuesday), the President may opt for a more neutral political figure which would path the way for a grand-coalition being formed.
– More firm US data ahead – cui bono?
We expect the firmer tone of US data to be maintained. For Feb durable goods orders on Tue, our economists expect a 5.3% m/m gain vs. 3.4% m/m consensus, and the March Chicago PMI should print 56 on Thurs. Still the Fed will remain on course with QE3 until it sees a substantial and sustained improvement in the labor markets. What’s notable is that the USD’s performance was mixed last week despite stronger US data and jitters in Europe. This is an indication that markets are excessively long USD (largest net long by our proprietary positioning indicator). We see scope for the USD to sell off and for the commodity currencies to rebound. BNP Paribas FX Positioning Analysis indicates that the market is holding substantially short CAD, in neutrally positioned in the AUD and holding only light positions in the NZD. We expect a higher appetite for risk taking to cause investors to establish long positions in CAD, AUD and NZD against the USD. Our favoured position is short USDCAD, and although we anticipate some further slowing in the Canadian Feb core CPI (Wed), we expect the Jan GDP to signal a positive start to Q1 with a gain of 0.3% m/m (Thurs). We target a move to 0.9935.
BNP Paribas