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Fundamental Morning Wrap: EUR, BoJ & Fed QE in focus

As the G20 meeting in Moscow kicks off, we have taken a look across institutional research and can see a few distinct (and unsurprising) themes at play; EUR, JPY and the Fed. There is a suspicion that the latest Euro dip is little more than a correction, but serious questions still need to be addressed in the region. Secondly, a new BoJ Governor looks set to be appointed and he may not be as radical as many had suspected. Finally, there is a growing belief that the US will look to gradually start scaling back its monetary easing during the year, providing that economic conditions.improve.


Mike Jones of BNZ feels that yesterday´s EUR collapse was a knee jerk reaction to soft GDP data, and the cooling of risk sentiment has helped to reaffirm USD´s safe haven appeal. Danske Bank analysts highlight that EUR swap rates fell yesterday after ECB Vice President Constancio, said that from the point of view of technicality the ECB is ready to introduce negative deposit rates. The ING economics team feel that while the Eurozones tentative recovery continues, it remains fragile and prone to adverse shocks. Their chief fear is that with Euro appreciation, coupled with renewed confidence in the solidarity of the region may have actually kill off the recovery before it even begins.

Geoffrey Yu of UBS note that they see a strong layer of support building around 1.3270 while Sebastien Galy of Societe Generale comments that he feels that rather than shorting EUR/USD, longing USD/CHF is the better option trade wise. He adds that overall, European growth remains mediocre and the odds are it will continue. Further, "JPY weakness and a tendency for the USD to weaken keeps it expensive." Derek Halpenny of the Bank of Tokyo Mitsubishi UFJ notes that support for the Euro is likely derived from comments by Weidmann who said that the ECB will not cut rates to weaken the currency. Finally, looking at the EC Tobin Tax proposal, Marc Chandler of Brown Brothers Harriman notes that while there is discontent from both the UK and the US, they both actually impose taxes on financial transactions already.


Mike Jones of BNZ notes that alongside USD, the JPY safe haven outperformed overnight as weak European GDP data took a toll on investor sentiment, with USD/JPY volatility continuing to hit one and half year highs. The Danske Bank research team comment that of the candidates for pending vacancy at the BoJ, conservative Muto is emerging as the main candidate, which has supported JPY. However, Derek Halpenny of Bank of Tokyo Mitsubishi UFJ notes that selecting either Kuroda and Muto may prove difficult for the LDP, who would likely rely on some division in the DPJ led Upper House to get either of them installed. Jim Reid, of Deutsche Bank adds that with PM Abe reportedly close to selecting his nominee, a decision could be within the next few days.

Geoffrey Yu and Gareth Barry of UBS feels that the prospect of a Muto appointment will naturally add to downside pressure on USD/JPY and that Japan is likely to escape formal censure in the official communiqué. In the long run they see USD/JPY continuing to climb. Sebastien Galy of Societe Generale feels that the G20 meeting may provide a nice opportunity to buy USD/JPY on any dips. he writes, “(The) Fair value of USD/JPY is 90-100 and as such the temptation is for the market to want to edge towards 100.”


David Coy of ANZ notes that non resident holding of NZ government Stock rose by NZD 1.9bln in January, the largest gain ever, and this defensive diversification should keep NZD elevated for now. Mike Jones of BNZ comments that yesterday´s onslaught of positive NZD data refuelled NZD. TS Securities note that the latest spike has taken the pair to a two and a half year high.


Mike Jones of BNZ feels that much of the coming G20 news is already priced into the market and quite predictable. This is reiterated by Danske Bank who note that a draft statement from Moscow included the textbook pledge to “refrain from competitive devaluation”. The Danske research team note that the main focus today will be on the G20 meeting in Moscow, with FX rates at the top of the agenda, and following the earlier confusion at the G7 meet, the G20 should act to confirm the earlier misconception.

Looking to the US, Derek Halpenny of Bank of Tokyo Mitsubishi UFJ notes that St Louis Fed President Bullard emphasising the more powerful monetary stance this year compared to last. He added that he would monitor the economy before deciding around Spring time whether it is worth taking some money off the table. This is reiterated by Jim Reid of Deutsche Bank who comments that the “Fed’s Bullard reiterated that it made sense for the Fed to slow asset purchases as data improved, rather than to suddenly bring the purchases to a halt, and said this could even be done in a formulaic manner where for every one-tenth decrease in the unemployment rate, the pace of purchases could be brought down by $15bn per month.”

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