So this week it’s Europe’s turn. For the single currency, Sunday’s Italian referendum on constitutional reform is not on the same scale as June’s Brexit vote and this month’s US election. In essence, it’s asking whether Italians want to reform the working of both the main and regional assemblies. But in reality it encompasses much wider issues, including the political future of the Italian Prime Minister Renzi. The ‘no’ side has been ahead for most of the past two months in the polls, but as the other two recent votes have shown, they cannot always be relied upon. For markets, should the ‘no’ side win the argument, then we’re going to see some increased volatility in Italian stocks, especially bank stocks given the perilous state of the banking sector in Italy. Political instability in Italy and elsewhere in Europe is nothing new, so the currency reaction on a no vote should not be out-sized, given the current polling.
The modest correction lower on the dollar seen Friday has continued overnight, with the yen leading the charge higher and reversing USDJPY below the 112.00 level. The extent of the dollar move and especially against the yen, leaves the market vulnerable to more corrective activity as larger investors take profits on long dollar positions. This may prove to be a correction in a wider up-trend, but purely on a momentum basis, it’s easy to justify at this point in time. For the start of the week, the data calendar is pretty light, with no major releases that are likely to rock the boat. Note that ECB President Draghi speaks in the EU parliament this afternoon at 14:00 GMT on the economy so that will be worth keeping an eye on.