After three weeks of nearly uninterrupted USD gains, the momentum of the US election’s impact on markets has finally started to wane. We are inclined to view this as a pause in a bullish trend.
The shift in market attention away from the US is in part dictated by increasing focus on this week’s schedule of events, with OPEC discussing potential oil supply cuts at today’s ordinary meeting in Vienna and Italy voting on a constitutional reform referendum on Sunday 4 December. Both events are likely to be market moving – in this issue of the FX Compass we examine how markets are positioned and highlight potential FX implications of different outcomes.
■ The Italian referendum. On Sunday 4 December, Italians will vote in a referendum on a broad constitutional reform package. The vote requires a simple majority and has no quorum requirement. Markets have been long focused on this event, even more so after the outcome of the US election alerted investors of the possibility of political risk surprises. We tend to disagree with the “idiosyncratic” pricing for risks currently in the market, and believe a ‘no’ vote would have negative EUR implications, both in the near and long term.
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■ The OPEC meeting. In contrast with the Italian referendum where FX markets have expressed a somewhat clear opinion, the latest developments in OPEC’s attempt to broker a coordinated cut in oil supply have been of marginal impact to FX markets. We see potential for this to change, depending on the outcome of the meeting. As it stands, our forecasts on crude exporter currencies incorporate a slightly bearish view on crude prices.
