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Weekly Outlook: October 1 - 5

Release Time:2018-10-01 02:15

The USD is ending the week on a firm note, broadly higher over the past five days but trading particularly stronger on the session versus the EUR amid renewed turmoil in Italian markets following the government setting a larger than expected budget deficit target (2.4%/GDP). Italian markets have plunged, with banks stocks limit down amid a rout in the bond market—BTP yields are up 35bps, driving spreads over bunds out to 260bps. A wider deficit had been seen as a risk amid the swing to populist politics but markets are concerned that 1) Italian fiscal dynamics look less sustainable 2) Rome may continue to butt heads with the EU about fiscal policy and 3) a sovereign ratings downgrade as soon as next month) may result. The bottom line is that investors fear a repeat of the bond/bank negative feedback loop that characterized the 2010/11 Eurozone sovereign debt crisis. On the day, the CHF has caught a natural bid amid the turmoil while the CAD is holding a modest gain on the session. European stocks are down, of course, weighing on US futures and clipping the MXN back. Asian FX is, for the most part, firmer on the day, with rate hikes supporting the PHP and IDR. Evident upward pressure on USD funding prices (via cross currency basis swaps) may be adding to broader USD support.