ITALY TURMOIL CAUSES A SEA OF RED FOR EUROPE STOCKS

Global stocks fell today as the crisis in Italy intensified. Germany’s DAX fell by almost 200 points, while Italy’s FTSE MIB fell by almost 3%. The yield of Italian bonds surged to above 1%, the highest level since 2014. US futures too point to a lower open, with the Dow losing more than 200 points. The crisis started when Italian president Sergio Mattarella prevented the birth of a new government led by the League and Five Star parties. The two parties had appointed Paolo Savona to be the economy minister. Today, the Bank of Italy governor said that the country was steps away from losing the asset of trust. The euro fell to 1.1508 against the dollar, 124.9 against the yen, and 0.8696 against the pound.

The US dollar rose to a 7-month high today as demand for the greenback increased. The US dollar index which tracks the dollar against a basket of 6 currencies rose to 94, the highest level since November. A major reason for this is the ongoing crisis in Italy. In an interview early today, respected Economist Mohammed El-Erian – who is the chief economist for Allianz – said that the US was the only economy ‘with legs’. He predicted that the US policy of deregulation, tax reform, and the infrastructure bill would lead to higher inflation, which will lead to a higher dollar as the Fed continues to normalize.

The Canadian dollar fell against the greenback as Canada’s Minister of Foreign Affairs Chrystia Freeland arrived in Washington. This trip is expected to focus on NAFTA, which has continued to face challenges under Trump. The negotiations have stalled mostly because of the demands from the US administration. Among the key differences between the three countries is the sunset clauses, which the US has proposed. Experts believe that the sunset clauses in a trade deal like NAFTA would not work because it would create uncertainty among firms on where to invest. Trump is using this as a way of preventing US firms from opening new operations in Canada and Mexico. Freeland will also seek exemption from US steel tariffs.

EUR/USD

The EUR/USD pair continued moving lower today as the crisis in Italy intensified. The pair reached a 7-month low of 1.1508 which is below its recent moving averages. The stochastic indicator is currently at the oversold zone while the RSI has been stable below 40. The pair could continue to go lower but traders should be cautious of a reversal once more direction is received from Italy.

USD/CAD

The USD/CAD pair is currently trading at 1.3000, which is significantly lower than the intraday high of 1.3045. This price is in line with the 50-day moving average and lower than the shorter 25-day MA. The MACD shows that the pair could continue moving lower, though the momentum for this is fading. The pair could test the important support level of 1.2987 as shown below.

USD/JPY

On Wednesday last week, the USD/JPY pair crossed the important support level of 110. Since then, the pair has continued to move lower and today, it crossed another support level of 108.9. The pair could continue moving lower to test another support. It could also change later today when we receive the US consumer confidence numbers and tomorrow’s ADP job numbers.