Italy’s new Prime Minister Giuseppi Conte won a Senate confidence vote after outlining an aggressive populist platform for Italy that is fully in line with the campaign promises of the two populist parties comprising the government. Conte will also face a vote in the lower house today, but the populists have a stronger majority there.
Italy currently runs a primary budget surplus of around 2% but a net deficit of around -2.3% in 2017 due to interest expenses.
Estimates suggest that a full implementation of the populist programme of flat taxes, a universal basic income, and other measures could cost some 4-5% of GDP and therefore put Italy in massive violation of the EU’s budget deficit rules. The country's sovereign debt yields rose sharply on these developments, with the two-year back to 1.00%, up 25 basis points from the previous day’s close and in contrast with the -0.35% that Italy could fund itself at for two-year debt before the election.
The euro was relatively firm despite the developments in Italy, as we discuss below in the G10 rundown.
Australia reported a stronger than expected rate of Q1 growth and this gave the Aussie a fresh boost as AUDUSD interacts with all manner of pivotal resistance – see our chart below.
Outside of USDJPY, the greenback is back on the defensive coming into this morning as risk appetite has perked up, if in a haphazard fashion as the major equity markets are in a complacent/positive mood even as EMs are showing ugly signs of strain here and there. The Brazilian real is in a negative spiral at the moment and MXN was blasted for sharp losses to new local lows after the Mexican government announced tariffs on US pork, steel, and whiskey.
The US is not making nice with China at the moment. It’s bad enough that the latest round of trade talks have ended with no progress and Secretary of Defense Mattis has raised objections to China’s activities in the South China Sea. But then overnight, the Trump administration encouraged airlines to defy China’s call to not list Taiwan as a country, a move guaranteed to raise Beijing’s ire.
The USD is weaker again versus the smaller G10 currencies this morning, led by the AUDUSD charge back higher, as that pair is testing a key zone with local Fibonacci swing level, flatline resistance, and major old trendline implications. The bears need an immediate end of the squeeze here as another firm leg higher and close above 0.7700-50 would fully neutralise the bearish case for now.