Here are three updates that came out during the holidays but could affect currency price action over the next couple of days:
Italy approves bailout for Monte dei Paschi
The Italian government has made an offer that the world’s oldest bank can’t refuse! In the last days of December the Italian government has authorized the use of €20B to prop up Italy’s banking sector.
If you’re just tuning in, you should know that Monte dei Paschi di Siena (MPS), the world’s oldest bank and Italy’s third largest lender, was thrown under the spotlight for holding bajillions of bad loans.
The ECB required MPS to cough up €5B by the end of the year to meet its capital requirements and compensate its bondholders. But after weeks of bank runs and stock price plunges, MPS failed to raise funds from private investors and so they cried S.O.S.
But in an unfortunate plot twist for the Italian government, the ECB announced that its bank stress tests were based on end-of-2015 numbers and that there’s been “rapid deterioration” in MPS’s liquidity since then.
The ECB now estimates that MPS needs not €5B, but a whopping €8.8B to stay above water. Under the EU bailout rules, this would mean that the government will shoulder about €6.5B while private investors to the bank’s junior bonds will take a hit to cover the rest. Stay tuned to see how euro traders will react to the pricier-than-expected bailout!
ECB: Inflation to pick up?
In its bulletin published just before the markets closed shop for the holidays, the European Central Bank (ECB) shared that headline inflation is likely to pick up in early 2017.
One key takeaway from the release is that the increase in oil prices has affected the ECB’s inflation projections. According to the bulletin, “headline inflation rates are likely to pick up significantly further at the turn of the year, to rates above 1%, mainly owing to base effects in the annual rate of change of energy prices.”
Despite that, the ECB staff projections for underlying inflation show no signs of sustained uptrend. For one thing, the impact of the rise in oil prices is expected to materialize with a lag, while wage growth and low rent inflation are keeping a lid on domestic cost pressures.
The December 2016 Eurosystem staff macroeconomic projections currently see a 0.2% annual HICP inflation by 2016, 1.3% in 2017, 1.5% in 2018, and 1.7% in 2019, mostly unchanged from its September projections.
China’s PMIs show momentum for expansion
Data from the world’s second largest economy hinted at momentum for expansion. China’s official manufacturing PMI came in at 54.1 in December, lower than November’s 51.7 but still represents the second highest reading in 2016.
Even the official services PMI came in at 54.5 after expanding at its quickest rate in 16 months (54.7) in November. Factory input prices also rose to a five-year high of 69.6 while input prices in the service industry also hit a three-year high of 56.2. Remember that a reading of 50.0 and above indicates expansion.
Meanwhile Caixin’s manufacturing PMI, a private survey that focuses on small and medium-sized businesses, clocked in at 51.9 earlier today, higher than the expected 50.9 figure and marks the fastest pace of expansion since January 2013.
Overall the numbers support claims that China’s efforts to boost the economy through easy monetary policies and heavier infrastructure spending are working. This means that the government now has more room to redirect dependence on growth away from production and into consumer spending. Someone holler at the comdoll traders!
That’s it for our list today! Hope they help in making your first trade ideas for the year. Good luck and good trading, fellas!
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