Italy Out of Proportion

ON POSITIONS - Ok so we're sitting on some out of the money positions on Thursday and now it's back to waiting. I had lightened up on USDJPY with the plan that I would either be profiting on a small portion or I would be building into the short further up. As things have played out, I have built into the short position and am now net short around 113.40. Nothing really new to talk about with the SPX500 short, though GOLD has slid back some more. But just as with USDJPY earlier this week, I am exceptionally light GOLD and will be happy to add to this long position as well. So long as GOLD holds above 1130, I believe the outlook continues to be constructive. I would also love to buy back into AUDNZD, but we need to wait some more here. Maybe we can even get in below 1.0400.

ON ITALY - Moving on, I'd like to now spend a few short moments talking about the Italian referendum. On Sunday, Italians will go to the polls to vote on whether or not they want to accept the changes proposed by the PM. These changes have nothing to do with EU membership and are about a shift in the balance of power in the government to allow for legislation to get passed more quickly. The current system has constrained this process and the PM has proposed a change. So why has this whole Italian deal blown up into a bigger issue? Well, the market is thinking that if the PM doesn't get a YES vote to his changes, he will resign and this will open the door for a new government with anti EU leanings. 

Market leaning too much on a NO vote in the Italian referendum. Via @joelkruger

MORE ON ITALY - But I will say two things to this speculation. The first is that the market has now pretty much priced in the Euro downside in the event of a NO vote. Sure, if confirmed we could see the Euro a little lower on the news, but I don't believe all that much lower. The second point is that the idea of this referendum translating into an Italian exit is a little aggressive. While a NO vote could threaten the Italian banking sector as it slows the recapitalization process, it's a stretch to think it will translate into Italy leaving the EU. So I think the market has blown this one out of proportion, which could actually leave room for Euro upside in the event of a YES vote. The other day I highlighted the technical risks associated with a Euro break below 1.0463. Today, I am highlighting risks to Euro upside if the Sunday vote produces a YES result. No trading ideas here, just some food for thought. 

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