It May Be A Weak Dollar Story, But Europe Is Center Stage In The Week Ahead

The issue is splitting the Italy coalition government. The Five-Star Movement is opposed, pending more progress on other elements of the banking union. The Democratic Party supports the reforms. The vocal right in Italy, which is in opposition on the federal level, is opposed.

Prime Minister Conte has offered a compromise where some technical reforms are made, including dropping the so-called single-limb collective action clauses that make it easier to restructure sovereign debt. Conte also wants assurances that sovereign bonds will continue to be regarded as risk-free assets. The Italian parliament will vote on the ESM reforms ahead of the summit. While Conte may carry the Chamber of Deputies, the Senate is more challenging because the majority is small. 

On either a moral grounds or from a realpolitik vantage point, there is no difference between the UK blocking a Brexit deal or France, because national interests are not being served, or Poland and Hungary vetoing the EU budget, or Italy with ESM reform. Yet, it reflects a governance failure as much as the inability of the US to approve new stimulus despite the Democrats, Republicans, and White House ostensibly favoring more assistance. It is a failure of leadership and imagination.

Given the risk that the eurozone economy is contracting, with inflation below zero for four consecutive months, and the political uncertainty a trade agreement with the UK, a dispute that is risking the EU budget and the 750 billion euro recovery fund, the timing of the upside breakout of the euro from its $1.16-$1.20 trading range since mid-July is a bit surprising.

It is now trading 10-year (120-month) moving average (~$1.2130) for the first time in six years. It broke above the downtrend off the record high in 2008 in July and has been consolidating above it. The broader price action underscores our conviction that the third big dollar rally since the end of Bretton Woods is over. The prospect of a more durable economic recovery by the middle of next year is also encouraging diversification away from the dollar and dollar assets.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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