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The Euro drops as Italian coalition talks collapse.

By Jake Trask

UK traders enjoyed a long weekend for the Spring Bank Holiday yesterday, however despite no action on UK desks, there was plenty of movement for sterling crosses as Italian politics created volatility throughout the FX world (of which more later). GBP/USD has dipped below 1.33 to currently sit around the 1.3280 handle as risk aversion hits the markets. There is little data of note this week from the UK with Friday's Manufacturing PMI being the only top-tier release of note. Expect Brexit news to be the main sterling driver of note until then.

The US also had an extended weekend for the Memorial Day public holiday where the nation remembers those in its armed forces who died serving their country. Understandably, it has been pretty quiet on the US political front over the past couple of days however it appears progress is being made with regards to a possible meeting between Donald Trump and Kim Jong-un. One of the North Korean leaders most trusted aides, General Kim Yong-chol is apparently on route to the States to try and reinvigorate efforts to get the two leaders to hold a summit. It’s not clear whether General Kim will meet President Trump himself however it seems both sides are trying to get the cancelled June 12th meeting in Singapore reinstated or at least rescheduled.

The world's focus is back on Italy today as coalition talks to form a government collapsed yesterday. With it seeming like we were getting close to a government between the populist Five Star and Northern League party’s being formed, Italian President, Sergio Mattarella pulled the plug on the talks meaning new elections in the Autumn are now likely. It seems the proposed choice of Paolo Savona as finance minister was enough for Mattarella to abort discussions given his anti-euro stance. Equity markets around the world are lower and Italian bond yields have jumped highlighting investor concerns what another vote could mean for the Italian economy and the Eurozone as a whole. The nightmare scenario is that populist parties harden their stance in the buildup to the next election and win on a campaign of exiting the euro. As unlikely as this is, the concerns will only add downward pressure to the single currency. Eurozone data kicks off tomorrow with German Retail Sales and CPI numbers and an Italian 10 year bond auction, which wouldn’t normally be much to talk about however Italian yields are back in focus. EUR/USD is at its lowest since November last year. GBP/EUR is around the 1.1440 mark.

With risk aversion hitting the markets on Italian politics the Aussie was lower against the greenback with AUD/USD testing .75 before retracing slightly. The only release of note from Down Under this week is the quarterly Private Capital Expenditure data with an increase of 1.1% expected for the closely watched gauge. Away for the CAPEX reading expect Italian politics, China/US trade talks and Fridays US Jobs Report likely to be the main drivers for the Aussie. GBP/AUD is at 1.7570.

Risk off sentiment and a fall in the price of Brent Crude saw USD/CAD push back above 1.30 before falling away a short time ago. News from Canada gets going on Wednesday afternoon with the latest Bank of Canada rate decision expected to show no change at 1.25%. The accompanying statement will be scrutinised to see if trade/Trump concerns are again highlighted as a concern the Canadian economy. GBP/CAD is at 1.7215.

Like the Aussie the Kiwi is lower this morning against the greenback as risk-off trade hits commodity currencies. There could be some swings in the local currency’s value tonight as the latest RBNZ Financial Stability Report is released as well as an accompanying discussion about the report between RBNZ Governor Orr and lawmakers in Wellington. GBP/NZD is at 1.91.