Yesterday, the big European news was around Italy budget deficit again. Even Theresa May’s visit to Brussels was overshadowed by the Italian issue. On the other side of the world, Japan is still struggling to raise its CPI figures.
Once again, the Italian budget deficit took the centre stage. Yesterday, the European Commission had rejected Italy’s budget plan, stating that it involves too much spending, which does not comply with EU rules.
The European Commission said that it is looking into implementing its Excessive Debt Procedure (EDP). The EU has around two weeks now to discuss if they should proceed with the measures or not and if they decide that this is necessary, the Commission will start drafting a new budget plan for Italy, so that it would be inline with the rules of the European Union. Certainly, the Italian government will a have a say on this as well and if they decide to reject all this, Brussels might impose sanctions, or in other words fines.
Of course, one should remember that there are still radical ideas circulating in Italy around the Italian version of Brexit, Italexit, which could start getting more interest if tensions with the EU accelerate. As we know already, Italy’s Deputy Prime Minister Matteo Salvini stated on Wednesday that the Italian 2.4% budget deficit target cannot be discussed, unlike the other points of the budget plan proposal. Just to remind the readers that the Italian debt currently sits around 132% to GDP, which is the second largest after Greece in regard to the European states, and the fourth largest in the world, after Japan, Greece and Lebanon.
During the Asian morning we have received inflation figures from Japan, which all came in line with expectations. The National Core CPI still remains at +1.0%, which is below their “Price Stability Target” at +2.0%. Given the current situation in Japan, some critics say that the target is way too high, even with a negative interest rate that currently is at -0.10%.
In order to help boost inflation, Japan is planning to implement certain measures like cutting phone charges and lowering education fees. It is believed, that this may help lift inflation in the coming years, as households would increase their purchasing power. One extra thing that is not helping the BoJ in achieving its goals, are the falling oil prices, as it creates obstacles on the way.
Even with the massive stimulus that the Bank of Japan has implemented, it admits that it is very unlikely that their inflation target could be reached until March 2021.
After bottoming near 1.6565 area, EUR/NZD managed to push itself back up to break above the short-term downside resistance line taken from the high of the 26th of October. Since then, the pair was temporarily stuck within a range between 1.6645 and 1.6765 levels, but as we can see now, the New Zealand dollar is losing its battle and EUR/NZD is breaking the upper side of that range. From the very short-term perspective, we will stick to the upside and aim slightly higher.
Because EUR/NZD has already broken the 1.6765 level, this gives more opportunities for the pair to make its way towards the next potential area of resistance near the 1.6835 hurdle, marked by the high of the 12th of November. But if that area is not able to withhold the bull-pressure, a further rate-rise could test the 1.6910 barrier, which acted as an intraday swing low of the 7th of November.
Alternatively, a reversal back down below the 1.6765 obstacle, could mean that the pair is not yet ready to climb higher. Such a move would place EUR/NZD back inside the aforementioned range. In order to start examining lower levels, we would need to see a break below the lower side of the range at 1.6645, which could open the path towards the 1.6565 obstacle, marked near the low of the 15th of November. Just slightly below that, there is another potential area of support that could get tested, is the 1.6525 hurdle, which was the low of the 11th of January.
After traveling lower, CAD/JPY reversed back up on Tuesday, which now gives a bit of hope for the bulls. From the short-term perspective, the pair might continue to push higher, but we should not forget that CAD/JPY still remains below the short-term tentative downside resistance line, drawn from the peak of the 3rd of October. For now, we will aim towards slightly higher levels, but the upside could be limited due to the above-mentioned downside line.
A good push above the 85.54 level, which was Tuesday’s high may open the door towards the next potential area of resistance at 85.80, marked by the Monday’s high. If that area is not able to withhold the rate down, CAD/JPY could travel further up. But as mentioned before the upside could be limited due to the tentative downside line, which could stall the pair, until the bulls and the bears decide who takes control from there onwards.
On the other hand, if the pair drops back down below the 84.90 zone, this could be a warning signal for the buyers, as the fall might lead CAD/JPY to the Tuesday’s lows at the 84.60 hurdle, a break of which could push the pair further down to test the 84.07 barrier, marked by the low of the 10th of September.
During the European morning, we get the minutes from the latest ECB policy gathering. At that gathering, the Bank kept its policy unchanged as was widely expected, reiterating, but not confirming, that asset purchases are likely to end in December. At the press conference, Draghi downplayed the softness in economic data, repeating that the risks surrounding Eurozone’s economic outlook remain broadly balanced. Thus, investors may be eager to find out whether other officials, besides Draghi, were also upbeat on the bloc’s economic outlook.
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