AUD/JPY: Italian Uncertainty, Debelle’s Comments Weigh on the Aussie

A combination of factors is presumed to weigh on the Australian dollar opposite the Japanese yen today. At the forefront are renewed concerns over the Euro Zone as results from the Italian elections are likely to show that the houses of parliament are split between the left and the right. Likewise, comments by Reserve Bank of Australia Assistant Governor Guy Debelle earlier today and a weaker than expected Chinese manufacturing report are also deemed to weaken the Aussie.

In a national election meant to propel Italy further down a path of economic reform, voters delivered a political gridlock that could once again unnerve Europe’s financial stability. Italy faced political paralysis as near-complete results showed no clear front-runner, raising the possibility of a hung parliament. Left-wing coalition led by the Democratic Party’s Pier Luigi Bersani appeared to have gained a narrow victory in the lower house, but no party appeared to be able to for a majority in the Senate. The uncertainty bodes ill for the nation’s efforts to pass the tough reforms it needs to snuff out its economic crisis and reassure the jittery markets. The chaotic election results perturbed the markets, with the Dow Jones exhibiting its largest drop since November.

Decisions the Italian government will make over the next several months are likely to have a deep impact on whether the continent can decisively stem its financial crisis. As the bloc’s third largest economy, its problems are deemed to rattle market sentiment, and experts worry that the nation could deviate from its reforms and revert to its old spending habits. The uncertainty also raised the possibility of new elections in the coming months, the worst possible outcome for the markets looking for Italy to stay the course of necessary reform. Risk-off trades are then seen to weaken the Aussie.

In Australia, RBA Assistant Governor Guy Debelle stressed that the central bank has been able to counter the effects of the strong Aussie by cutting the cash rate in a speech to the University of Adelaide Business School. As such, he reiterated that the RBA could further slash interest rates if the high Dollar continued to have a negative impact. Meanwhile, an initial gauge of China’s manufacturing activity slowed considerably in February amid weakness in global demand and the Lunar New Year Holidays, raising concerns over the momentum of recovery in the world’s second largest economy. The HSBC Flash Manufacturing PMI fell from 52.3 points to 50.4 points, its lowest level in four months. Considering these, a short position is advised for the AUD/JPY trades today.