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Italian coalition formed, 'trade-war' tariffs enacted and North Korean official visits the US after nearly 20 years


UK traders enjoyed a Spring Bank Holiday long weekend to start the week, however, despite no action on UK desks, there was plenty of movement for sterling crosses as Italian politics created volatility throughout the FX world. The GBP pushed higher against the euro as the single currency was dumped across the board on the collapse in Italian coalition talks, however, on the flip side of the coin, the GBP dropped against the dollar as the greenback was one of the main beneficiaries from the European political drama.

It’s been a quiet week data and Brexit-wise for the pound- announcements of note included the release of Net Lending to Individuals (expected to rise from £4.2B to £5.2B m/m ; actual was £5.7B) and the monthly Manufacturing PMI expected to drop from 53.9 to 53.5 (actual was 54.4). Despite the postive prints, the Cable saw a slow but steady decline to for most fo the week. Recent comments from Mark Carney playing down the 'soft patch' in the UK economy has meant data is coming under extra scrutiny and the key print for the UK in the next few days will be Tuesdays services PMI as this sector represents 80% of the UK economy. Data-wise this will be the key event from the UK next week.

After months of wrangling and the threat of new elections roiling markets at the beginning of last week, a coalition government has finally been formed in Italy. The sticking point on Monday that saw talk’s stall was the choice of Paolo Savona as Economy Minister which was vetoed by Italian President Sergio Mattarella on concerns that his anti-euro stance could lead to Italy leaving the single currency. Instead, Economics Professor Giovanni Tria will take up the Economy Minister position with Savona taking up European affairs. Relief has been breathed throughout the markets with European bourses up across the board.

This stall saw equity markets around the world push lower and Italian bond yields jump, highlighting investor concerns what another vote could've mean for the Italian economy and the Eurozone as a whole. The nightmare scenario was that populist parties would harden their stance in the buildup to the next election and win on a campaign of exiting the euro. As unlikely as this was, the concerns only added downward pressure to the single currency.

Mid-week, relief was sighed throughout Europe and the wider world as Italy’s latest bond auction was well received by investors with 10 year debt yielding 3% and the bid to cover ratio at 1.5. Although the yields were the highest in four years it was in line with the secondary market and the bid to cover was actually a higher than the last auction highlighting good demand and confidence from investors.

Last week saw 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 was a pretty quiet start to the week on the US political front, however, progress being made with regards to a possible meeting between Donald Trump and Kim Jong-un was in focus. One of the North Korean leaders most trusted aides, General Kim Yong-Chol, was on route to the White House to try and reinvigorate efforts to get the two leaders to hold a summit. General Kim is the highest-ranking North Korean official to visit the US in nearly 20 years and it seems both sides are trying to get the canceled June 12th meeting in Singapore reinstated or at least rescheduled. Late Friday, Trump has announced the meeting is 'back on track'.

After the turmoil in Europe, relative calm returned to world markets near the end of the week and all eyes in the US at least shifted to the US Jobs Report. The report, released at 8:30 am EST on Friday, expected Non-Farm Payrolls to have increased by around 189k in May, however the headline number was well above at 223K. Despite the NFP being the headline print, the market is more focused on the wage growth number with earnings increasing by 0.3% on a monthly basis and 2.7% as the annualized figure which was expected. The numbers are giving market participants the signal a June rate hike from the Fed is now even more possible.

Away from data, the Trump administration has enacted its threat to impose steel and aluminum tariffs overnight with Canada, Mexico, and the EU being hit with 25% import duty on steel and 10% on aluminum. Commodity currencies dipped on the news. Asian equities finished lower to close out the week however European bourses are in positive territory this as positive news regarding the Italian coalition emerged. Gold and oil are both lower to end the week and start the month, with gold currently at 1295.10 down 4.93 and WTI crude at 66.50 dollars per barrel done 54 cents US.

The beginning of the week saw the Aussie oscillate between resistance and support around the 0.7540 - 0.7580 range, with all market participants finding little news to digest. Thinly traded for much of the day due to public holidays in the US and UK, the AUD found itself trading tight. With a bare macro-economic calendar both domestically and internationally to drive momentum, sentiment provided the initiative with headlines from Europe and the US dominating market attention. At the slightest sign of trouble, investors found their safe haven in the Greenback, forcing it higher against all counterparts despite the public holidays.

The increased likelihood of fresh Italian elections and the growing support within Spain for the left-wing opposition sent the Euro sharply lower and landed a heavy blow to broader risk sentiments forcing the AUD to shorten against the traditional haven drawcards, the USD, JPY and CHF. Come Wednesday, political tensions within Italy had eased somewhat and risk sentiment found renewed demand, causing a surge for the AUD off intraday lows at 0.7480 to touch session highs at 0.7581 as investors bought back positions sold in panic on Tuesday.

The surge in risk based selling and buying has done little to change our longer run outlook and we are still looking to next months FOMC policy meeting for broader direction and guidance on U.S monetary policy. With the Fed maintaining its process of policy tightening and the RBA firmly entrenched in a neutral policy setting, the yield advantage enjoyed by the USD could sit as much as 1% above our own domestic unit. An unprecedented level and primary reason we maintain a largely bearish outlook for the AUD moving into the 2nd half of the year.

The Canadian dollar started the week on the back foot, continuing to weaken in the aftermath of sluggish oil prices. WTI crude has been on a free fall after talks between Saudi Arabia and Russia ending with both sides wanting to ramp up production by 1 million barrels per day. It seems market participants are taking profit and selling oil at an elevated price after the 17-month production cuts from OPEC and its allies curb the global oil glut.

NAFTA negotiations are still ongoing, and the Canadian Prime Minister Justin Trudeau has chimed in stating that a win-win deal is still possible, but that Canada will not be pressured on hardline tactics and he would rather see the agreement end than accept specific demands. Statistics Canada released the 1st quarter GDP figures tomorrow and forecast are for a slightly better reading from the previous quarter, expectations are for a print of 2% from the prior of 1.7%. The Canadian central bank has stated the GDP is a significant metric that is used in the predictions on the future direction for inflation. The Bank of Canada has an inflationary target from one to two percent.

Mid-week, saw the Bank of Canada as expected leave interest rates unchanged at 1.25%. In the rate statement, the BOC did make some critical edits to its wording. The edits signaled to market participants that the central bank is ready to raise rates, as the wording changes from “cautious” to “gradual.” The BOC said that it will remain data dependent and that it will closely monitor domestic and global economic fundamentals. The loonie gained on all its G10 counterparts on the release of the statement as market participants raise the probability of a July rate hike.

Elsewhere, the exemption on US metal tariffs has ended for Canada, Mexico, and the European Union. An all-out trade war is no longer in question. Canada throws some punches of its own back with tariffs of its own on US exports, everything from orange juice to recreational watercraft to whiskey. Metal tariffs are being added as the Trump administration has the authority to impose duties on the bases of national security. Trudeau and Trump will meet at the G7 leader's meetings in Charlevoix, Quebec next week. The tariffs from both sides are hindering the NAFTA negotiations, as the uncertainty of a fair deal that all parties involved are seeking.

The New Zealand Dollar opened last week at 0.6920 against the US Dollar and traded in a tight band as both public holidays were observed in the United States and United Kingdom. The NZD/EUR cross was one of the largest winners to begin the week, gaining 1% to 0.5980 as European markets opened for the week and yields continued to increase rapidly in Italy. A possible downgrade on review by ratings agency Moody could be on the cards for Italy from its current Baa2 rating as the Kiwi tested yearly highs against the Euro. 2-year Italian bond yields fell just over 100bps this week, reversing more than half of the incredible move higher on Tuesday night. The news calmed markets across the world, including the NZD market which saw almost an immediate impact. While the rhetoric in Italy remains fluid at best, the market welcomed the relief nonetheless.

On Wednesday the RBNZ Financial Stability report was released, stating that the financial system is “sound and efficient” with no change materially in the past six months. There was little to no impact to the Kiwi following the release, investors were more interested in RBNZ Governor Orrs afternoon speech for further influence on movements for the local currency. And following that, the ANZ Business Survey was released with a weaker than expected reading that ultimately didn’t have a lasting impact on the Kiwi’s fortunes.

The Kiwi enjoyed a quiet domestic calendar to close out the week and all eyes turn to the headlines for developing stories in Europe and US trade tensions with China.