Italy’s policy (Afternoon analysis 28.05.2018)

The EUR/USD quotations are unstable after reports on the future government in Italy. There is less pressure on emerging market currencies from energy sources. The zloty has been gaining in value slightly, but the nervousness has persisted. The EUR/PLN on the 4.30 level.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Italy gets the attention

A lot has happened in the context of Italy since the Friday session. It is certainly not possible to receive positively the information from the beginning of the weekend, when Moody's began a review of Italy's rating in the context of new spending and lower fiscal revenue. If this review is brought to a negative conclusion, Rome can expect a cut in creditworthiness, which is currently two levels above the junk limit, and the outlook is negative.

However, market participants quickly ceased to be concerned about rating issues as the policy returned to the headlines. Sergio Mattarella, President of Italy, rejected the eurosceptic candidate for Minister of Finance, Paolo Savon, put forward by the League and the Five Stars Movement.

Mattarella, who was appointed by the previous Parliament, has the right to reject the candidates put forward as ministers. He can also present members of the government of his choice, but Parliament can of course reject them by the vote of confidence. The result is a stalemate situation of three/four solutions.

The first of them is when the parliamentary majority will present a candidate who is acceptable to the President. However, it seems that the populist coalition will not do this. The second solution could be to reject the presidential candidates, dissolve the parliament and hold new elections. This seems quite likely, but it is not at all positive for the markets. Taking the surveys into account, the League and the Movement duo will win even more seats in the new parliament and we may have a re-run, but on a larger scale.

Parliament can also demand the President's impeachment, which would make the situation even worse, and the creditors who have the Italy's debt would not like it. Theoretically, a positive solution is also possible - the presentation of a candidate for the Minister of Finance, who will be accepted by Mattarella.

A positive scenario, which would probably improve the sentiment for a longer period time, will be difficult to achieve because it would mean an image failure for the League and the Movement. Matteo Salvini, President of the League, said this morning on Facebook that "the League will form a government with the people rejected by Mattarella". In the context of the EU, he wrote that "either the rules of the Union will change or there is no reason for Italy to stay in the European Union".

In the morning, the market reacted positively to the President's rejection of the new cabinet, hoping that this would calm the situation. It seems, however, that it may be quite the opposite. Parliament will most probably not accept the government imposed by Mattarella, and we will therefore have new elections in which the League and the Movement will win with even more votes. Populist parties will also have a greater mandate for change than they have now, which may exacerbate the conflict not only with the President, but also with Brussels. Current events may also weigh on the euro for months and give rise to a discussion on the EU breakup.

Oil and the zloty

Apart from the situation in Italy, it is important for the Polish zloty is the sentiment on the currencies of developing countries. It is partly created by the price of oil. Oil has been clearly losing its value since Friday, which can bring relief to its importers. In the coming weeks (until the OPEC meeting at the end of June), there will be a lot of discussion on how the Cartel and Russia could work to reduce tensions in the oil market. However, it seems that the cartel decision is unlikely to be aimed at pushing prices very low (below 60 USD per barrel). Therefore, the pressure from energy resources will decrease, but a strong positive signal (a serious 20-dollar price drop) from this market is unlikely to appear.

The more negative information from Italy, the worse it is for the zloty. The main barometer of this sentiment is the EUR/CHF, which fell to 1.1540 on Friday, which also pushed the CHF/PLN to the limit of 3.74. At the moment, the situation on the zloty remains as unclear as in Italy. It is clear, however, that Italy's problems will not disappear rather quickly, and that the national currency should not be expected to start catching up quickly.