US and Italian Govts in Crisis, Euro Drops

Major developments hit markets on the weekend with the US poised for a government shutdown and Italy's government on the brink of collapse. The yen shot higher at the open and the euro sank. The Chinese private manufacturing PMI is up later.

Italy's delicate coalition unravelled Saturday after Berlusconi's cabinet ministers pulled out after failed negotiations on delaying a scheduled VAT hike. PM Letta now has two or three days to preserve his government and the market will be hanging on every headline. So far the reaction is unequivocally negative with EUR/JPY down 100 pips to 131.90 and EUR/USD down 30 pips to 1.3490.

The US is nearing its own political crisis as optimism about a budget compromise has faded. The Senate will meet on Monday afternoon and assuredly shoot down a Republican funding bill with a caveat that delays Obamacare for a year. If no funding bill is passed, the government will begin an economically destabilizing shutdown at midnight. In the background, the debt ceiling is only 2-3 weeks away.

Other headlines that could swing the market will come from Japanese industrial production at 2350 GMT. It's expected to contract 0.3% in August. Afterwards it's the Chinese HSBC/Markit manufacturing PMI for September at 0145 GMT. It's the final release so the impact is lighter than the flash reading, which was 51.2.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR +66K vs +32K prior JPY -93K vs -89K prior GBP +1K vs -6K prior AUD -35K vs -27K prior CAD -6K vs -19K prior CHF +6K vs +1K prior NZD +8K vs +6 prior US Dollar Index longs at 4K vs 22K prior

This is the first look at positioning after the Fed decision and it's clear US dollar bulls were in a rush to the exits. Now, with the US govt or the brink of a shutdown and Italy's govt collapsing it could be the yen's turn.