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Fundamental morning Wrap: AUD joins the EURusal suspects in focus

Taking a look across institutional research this morning brings three themes into play. Sterling is out and AUD is in, joining EUR and JPY as the market focal points. On a quiet morning, attention has fallen on the pending LTRO II and Italian elections on Friday and the weekend. Over in Japan, the views appear to be that officials look like they are playing a ´two steps forward, one step back´ approach to verbal intervention, which they may feel is more subtle than it is actually coming across. Finally, down under in Australia, the RBA looks unlikely to cut rates further at the moment as previous adjustments look to have had the desired effect. In the macro space, there is a bit of quiet, but the US´s rapid climb up the energy producing table is raising eyebrows, while there are hints that we may be at the start of a prolonged equity rally.


While everything looks quiet on the European front at the moment, Danske Bank analysts notes that European periphery bond spreads widened again on Monday following activity on Friday, as nervousness about the Italian election starts to build. Jim Reid of Deutsche Bank supports this sentiment noting that both Spanish and Italian 10 year yields edged higher on Italian developments. He also comments that Draghi´s speech to the European Parliament included a reference to Ireland´s IBRC promissory note, describing it as a positive step which will be reviewed later in the year. Reid adds that Draghi sees slow growth for the next couple of years and seemingly rejecting a BoE Funding for Lending Scheme, commenting that it could force lending to the “wrong borrowers”.

Meanwhile, Carsten Brzeski of ING comments that the European Commission´s latest economic forecasts are due on Friday and they look to be the first test case of the Eurozone´s ever stricter fiscal rules. John Normand of JPMorgan comments that following the G20, the European LTRO II repayments on Friday should give a cue to sentiment. He is expecting a figure around EUR 100-125bln, and in simple terms, the higher the number, the higher the Euro. Adrian Foster of Rabobank comments that the EZ´s return to external surplus is one of the reasons for Euro´s resilience amongst the many challenges it faces. Geoffrey Yu and Gareth Barry of UBS comment that whether by design or by accident, the ECB is losing the currency war simply by giving the slightest hints of optimism, and unwillingness to be more vocal on the global stage.


Khoon Goh of ANZ notes that JPY weakness has been cited as a reason for Asian currencies to follow suit but generally, he suspects that this is not borne out of empirical analysis. He feels that while there is no doubt that JPY has had some effect, specific local factors have been more influential in some of the recent moves in Asian currencies. Meanwhile, Lee Hardman at Bank of Tokyo Mitsubishi UFJ notes that comments from Japanese FinMin Aso poured cold water on the foreign bond buying suggestion of PM Abe the night previous, which strengthen Yen sentiment. Danske Bank analysts note that the overnight BoJ meeting focused on the newly implemented 2% inflation target, with two members commenting that it was too unrealistic if the integrity of the BoJ is to be maintained.

Jim Reid of Deutsche Bank notes a similar theme, but adds that recent polls suggest that Abe’s Cabinet has increased its popularity since its recent inauguration to 62%, the first administration to increase its popularity since coming to power “in years”. He adds that the government is believed to be proposing its candidates for the top three BoJ positions when Abe returns from his visit to the White House. Geoffrey Yu and Gareth Barry of UBS note that last nights BoJ minutes gave some insight into the thinking of the members, especially the explicit desire to increase the JGB purchase target from the viewpoint of exerting influence on the fx market through a decline in yields. Kit Juckes of SocGen writes, “ BOJ policy is to throw the kitchen sink at the problem of persistent deflation. From the narrow perspective of an FX strategist, that mans doing all they can to weaken the yen without saying so too loudly.”


Robert Henderson of NAB notes that minutes from the RBA’s Board meeting of 5 February say that there are some signs that their 175bps of policy easing since October 2011 is starting to work. Hence, the prudent course was to leave rates on hold at 3.0%. Gregg Gibbs of RBS feels that strong Australian equities suggest that the RBA doesn´t need to ease further at this juncture, and that the relative softness of AUD may not last. Kit Juckes, of SocGen adds to the sentiment by noting that the minutes show that if growth now re-accelerates, they won't cut further and he feels that a weaker AUD still looks to be on the cards for now.


Rob Carnell of ING notes that the US is rapidly rising up the ranks of oil producers, giving rise to thought of the demise of OPEC. He adds, “Whilst we aren’t going to join that argument one way or the other, the growth of US shale in recent years has been nothing short of amazing.” Kit Juckes of SocGen notes on a popular report which claims that single stock volatility is at its lowest point in 80 years, and the last time it occurred, a powerful rally followed.

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