Italian budget plans mark a test of euro's resolve Italian budget plans mark a test of euro's resolve Italian budget plans mark a test of euro's resolve

Italian budget plans mark a test of euro's resolve

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  Italy’s populist government has declared the intent to run a 2.4% budget deficit for the next three years, higher than previous estimates and a key test for Italy’s government debt market and EU existential questions.

Italy’s populist government has declared the intent to run a 2.4% budget deficit for the next three years, higher than previous estimates and a key test for Italy’s government debt market and EU existential questions. EURCHF looks most sensitive to developments there after a rally attempt. Elsewhere, the USD swings back to selective strength.

The drama around the Italian budget planning process is the dominant focus this morning. Yesterday, Italian BTPs rallied stronger in a vote of confidence that, despite populist proclamations, a smallish budget deficit would win the day. But the news late yesterday that the populist government would pursue a 2.4% deficit in 2019 and added insult to BTP injury with defiant rhetoric (vowing not to be held “hostage” to markets – although every country is a hostage to markets and possibly for the ensuing two years rattled confidence in Italian debt and the euro.

EURCHF put in a strong rally yesterday that is suffering a setback since the news of the larger deficit broke. It looks like the 100 basis point level is an important one for Italy’s two-year BTP – it closed yesterday at 75 basis points before the yield jumped higher at the open today and traded above 100 basis points as of this writing. The chart below illustrates the significance of the 100 basis point level, which looks like an important one to maintain to keep a lid on the situation.

Chart: Italy’s two-year BTP yield

Two-year BTP yield
Source: Bloomberg

Elsewhere, the USD has rallied a bit by default and a bit tough to build a story behind that. US long yields are well off their highs for the cycle earlier this week, and yet USDJPY managed to pop to new highs after mixed data from Japan overnight, including a weak Industrial Production figure for August. Hard to see USDJPY sustaining a rally into the next resistance levels above 114.50 without US yields swinging back higher. 

Ahead of the weekend, we have both eyes on Italian BTPs and whether the situation sets in motion a further contagion and real showdown with the EU or whether a bit of market “hostage taking” softens the edges of the populists’ stance. If we get longer term traction on the idea that the EU will have to turn its back on austerity, the 2.4% deficit from Italy would be an easy one to overcome. But we need more signaling on that front from EU governments.

Over the weekend and into early next week, we watch for the degree of UK Conservative Party solidarity on whatever negotiation position it declares before the mid-November EU Summit. The CNY situation remains a nail-biter, but may not see any resolution next week as China’s markets are closed for a national holiday all week. Finally, US PCE inflation today is an interesting test of the post-FOMC reaction in the US dollar and US Treasuries. 

The G-10 rundown

USD – the US dollar stronger against most DM currencies, but global risk appetite looks robust and EM currencies don’t appear concerned. The drivers of USD strength here post FOMC are tough to discern, so we are a bit sceptical.

EUR – existential concerns set in motion by Italy’s budget situation – if the lid can stay on Italian yields, the euro may quickly find a new floor.

JPY – if non-Italian yields get back to a rising tendency and risk appetite stays strong, further JPY weakness may lie ahead. Tactically, the USDJPY break higher on a Friday with no support (so far) from the long end of the US yield curve looks odd.

GBP – sterling a bit passive here, but still relatively firm versus the Euro. We await the Tory party conference this weekend. Only full solidarity can deliver a Brexit, otherwise we risk an extension of the negotiation period, elections and possibly a second referendum down the road.

CHF – the proxy for EU existential risks at the moment – still a change for EURCHF to pick up the pieces here if today’s rise in Italian yields is halted quickly.

AUD – may be getting dragged a bit lower by the weak CNY. As well, the RBA is not expected to bring anything new to the table next Tuesday.

CAD – the loonie is bid ahead of today’s latest Canadian GDP data and as BoC’s Poloz expresses confidence that Canada will reach a trade deal with the US.

NZD – ditto from the Aussie comments – NZ rates are dead in the water. As well, the AUDNZD flirt with sub-1.0900 pivots rejected for now – rate spreads AUDNZD mispricing on the weak side.

SEK – one of the few trends going is the SEK repricing higher – Friday’s are often days for lightening up on positions, however.

NOK – EURNOK pushing solidly below 9.50 for the first time since July and we see further potential for downside into 9.40 at least for now, but more to follow later.

Upcoming Economic Calendar Highlights (all times GMT)

• 0800 – Norway Sep. Unemployment Rate
• 0830 – UK Q2 Final GDP Revision
• 0900 – Eurozone Sep. Flash CPI
• 1230 – US Aug. PCE Inflation
• 1230 – Canada Jul. GDP
• 1235 – ECB’s Praet to Speak
• 1345 – US Chicago Sep. PMI
• 1400 – US Sep. Final Univ. Michigan Confidence
• 2045 – US Fed’s Williams to Speak


The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.