Yen Aims Higher on Coronavirus, Euro Up as Italy Risk Eases

YEN, CORONAVIRUS, STOCKS, EURO, ITALY, SALVINI – TALKING POINTS:

• Yen up as markets swoon amid coronavirus outbreak worries
• S&P 500 futures hint market mood likely to remain defensive
• Euro gains as Italian yields drop after League loses key vote

The perennially anti-risk Japanese Yen outperformed in Asia Pacific trade as worries about the likely economic dislocation touched off by a spreading coronavirus outbreak and violence in the Middle East spooked financial markets. The similarly-minded Swiss Franc and US Dollar likewise rose, while pro-risk currencies – the Australian, Canadian and New Zealand Dollars – faced outsized selling pressure.

Chart created with TradingView

The Euro held up despite carnage as the eurosceptic League party in Italy suffered defeat in a key regional election in Emilia-Romagna. A center-left bloc led by the Democratic Party prevailed, easing pressure on the government of Prime Minister Giuseppe Monte and reducing the likelihood of a snap election. League leader Matteo Salvini has attempted to unseat Monte and looked to be marshalling support to try anew.

The single currency rose as the spread between Italian and German 10-year bond yields narrowed. German government debt is typically used a low-risk benchmark for the Eurozone. A narrowing in the cost of lending to Rome versus Berlin speaks to investors’ increased confidence in Italy’s creditworthiness. Gains might be short-lived however as markets contend with last week’s dovish guidance from the ECB.

Chart created with TradingView

Looking ahead, bellwether S&P 500 stock index futures as well as contracts tracking top European equity benchmarks are pointing sharply lower in late APAC trade. This hints that the broadly risk-off tilt across markets has scope for follow-through. The German IFO business confidence survey headlines the data docket. An uptick is expected but seems likely to pass mostly unnoticed in the current environment.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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