Animal Spirits Return And The Euro Probes Two-Month Lows

The dollar rose above JPY105 yesterday, albeit barely, for the first time since mid-November.  It continues to straddle it today, being confined to about a 10-tick range on both sides of JPY104.95.There was little response to news that the formal state of emergency covering part of the country responsible for about 60% of GDP until March 7. The move does not appear over, and the next upside target is the JPY105.35 area and then JPY105.60, where the 200-day moving average is found. The dollar has not traded above it since last June. The Australian dollar is pinned on its lows, holdings just above $0.7600, where an expiring option is struck for A$1.2 bln. A convincing break would target the $0.7500 area in the coming days. Initial resistance is seen in the $0.7540 area. The dollar's reference rate was set at CNY6.4736, a pinch above the median (Bloomberg) survey projection. It was, though the 11th session that the dollar's reference rate was above the survey median. The PBOC injected funds again (third day), and last week's squeeze has ended. The overnight repo rate fell more than 50 bp to about 2.25%, the lowest in a couple of weeks. It peaked last week near 3.33%, a five-year high. The onshore yuan continues to trade firmer than the offshore yuan.  

Europe

Germany, France, and Spain surprised with better than expected GDP figures. Italy came in as expected today with a 2% contraction following a 16% expansion in Q3. The net result was a 0.7% contraction on the aggregate level, a little better than forecast. Moreover, with the virus, slow vaccine rollout, and continued high level of social restrictions, there is concern that the euro area economy is contracting this quarter as well. Tomorrow, Markit is expected to confirm that the composite PMI on the aggregate level remained below the 50 boom/bust level for the third consecutive month. Recall that the US economy expanded by 4.0% (annualized). 

In addition to the health and economic challenges, Italy's simmering political troubles have yet to be resolved. Apparently, Prime Minister Conte's effort to build another coalition with the same parliament is on the verge of failing. A report back to President Mattarella is due by the end of the day. Former Prime Minister Renzi, who withdrew his small party's support for the government, precipitated the crisis, reportedly has supported the idea of a technocrat government, perhaps led by former Bank of Italy Governor and ECB President Draghi. Meanwhile, the League's Salvini, who pulled out of the first Conte government, is advocating new elections. According to a weekend poll, about 40% of the public supports a new government led by Conte, but nearly as many (36%) prefer a different leader. About 28% favor a new election. Although we thought a cabinet reshuffle would be all that it took to preserve the government, we recognize that the options are getting narrower, and time is running out. So far, the market impact looks minor.  

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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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