Euro Dives On Italian Political Crisis

The euro opened the week sharply lower, unsettled by political turmoil in Italy. The Italian cabinet failed to agree on the measures to lower the budget deficit to meet EU's limit. Prime minister Letta challenged former prime minister Berlusconi's Forza Italia party to support him in a confidence vote in the parliament. And on Saturday, Berlusconi pulled his five ministers out of the cabinet, effectively bringing down the government, and called for new elections just seven months after the last one. Letta is forced to call for a confidence vote on Wednesday. The euro is pressured by the news and is back trading below 1.35 again, the dollar took out 131.86 near term support against the yen and broke 0.8352 low against Sterling. The EUR/CHF is also hit hard by taking out 1.2218 support.

Asian markets are also weighed down by China's economic data. The HSBC manufacturing PMI was finalized at 50.2 in September, just a touch higher than August's 50.1. More importantly, that was way below initial estimate of 51.2. HSBC China chief economist noted that, "manufacturers restocking process continued but remained relatively slow. Growth is bottoming out on Beijing's mini-stimulus. We expect continuous policy efforts to sustain the recovery."

Financial markets are soft today with Nikkei dropping more than -300 pts and HK HSI dropping more than -300 pts too in early Asian session. The Japanese yen is the biggest winner so far on risk aversion. But it should be noted that while the Swiss franc is also strong, Sterling is even a bit stronger. The dollar is mixed for the moment. While it's pressured by worries of US government shut down, the commodity currencies are even harder hit by the current risk averse sentiments.

Elsewhere, New Zealand building permits rose 1.4% mom in August versus expectation of 2.5% mom. NBNZ business confidence improved notably to 54.1 in September. Australia TD inflation expectation rose 0.2% mom in September. Japan PMI manufacturing rose slightly to 52.5 in September while industrial production dropped -0.7% mom in August and retail sales rose 1.1% yoy. Looking ahead, Japan housing starts, German retail sales, eurozone CPI and UK mortgage approvals will be featured in european session. Canada will release GDP, IPPI and RMPI while US will release Chicago PMI later in the day.

Latest CFTC data showed sharp improvement in euro net positions on September 24, comparing to the prior week. euro net long jumped sharply to 65.8k, hitting new 2013 high, up from 31.9k. Sterling net positions turned long to 1.2k, from -6.3k. The yen net short was basically unchanged at -92.8k. Thje Canadian dollar net shorts dropped further to -5.7k, hitting the best level since February. And, the Aussie net short rose slightly to -34.8k, from -27.4k.