The picture for the EUR/USD remains shaky in the near term. Political developments in Italy are still center stage and will probably continue to remain the most critical driver for the euro for the time being. Still, contained contagion in the bond markets implies that the budget talks are still perceived as a “local” issue. The market behavior suggests to us that the Italian developments are likely to just add “noise” to the common currency at the moment, but are not seen as grave enough to trigger a heavy sell-off towards levels below the lows of just above 1.1300 that were hit in August.

The CAD was little changed against broadly stronger USD on Tuesday, holding on to most of the gains that followed a deal over the weekend to revamp the NAFTA trade pact. Buoyed by the trade deal, Canada has been pressing Washington to remove steel and aluminum tariffs.   A U.S. agreement to drop metal tariffs could trigger additional gains for the loonie.

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