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Fundamental Afternoon Wrap: You don´t know what you´ve got till EUR gone

Europe has come thundering back into analyst thoughts this afternoon with an almighty crescendo of focus and consideration. This morning´s below expected PMI readings highlights that while the situation is not great, it is slowly improving for Germany, the engine of the region, while fellow core economy France is starting to contract and weigh on the region. Meanwhile, last nights FOMC minutes are also in the spotlight still, with some analysts believing that the non voting status of dissenters is the key take away while others feel that the minutes are signalling a slow shift in US monetary policy.


Clemente De Lucia of BNP Paribas notes that today´s data was a little disappointing but she feels that Q1 GDP could surprise to the upside if the rebound in Germany will be as strong as some indicators (PMI, IFO, European Commission) suggest. This is supported by Brown Brothers Harriman analysts who note that despite flash PMI being poor, evidence of a slow recovery in Germany continues to mount. However, they add that this is in stark contrast to France, where the economy appears to be contracting, and the divergence of Europe key Core economies continues to grow as a theme.

Ulrich Leuchtmann of Commerzbank comments that the only possible support for EUR/USD might be provided by the PMI publications for the euro zone. He writes, “A recovery of the euro zone economy would lead to a notable fall in ECB rate cut fantasies. However, that would only provide gradual relief for the weakened EUR-USD exchange rate. The large majority of market participants are not likely to expect a rate cut anyway. The US is responsible for the qualitative shift. The PMI data will only have a marginal effect on the development of the exchange rate.”

Danske Bank analysts comment, “EUR/USD risks are probably skewed the down side as i) speculation of an early exit from QE, ii) the automatic spending cuts, the so-called sequester, kicks in on 1 March and iii) the threat of a potential government shutdown by 27 March are factors that are likely to reduce investor's risk appetite and weigh on EUR/USD.” However, the feel that it is still too early to call a reversal in the EUR/USD up-trend as they still see underlying support to the euro and expect it to benefit from a combination of a return of 'safe haven' flows back into the euro and cyclical support from the global recovery.

Goldman Sachs analysts meanwhile feel that there is reasonable chance of success for reforms in the Euro area and that a combination of factors contribute to the implementation of reforms (political environment and institutional quality), alongside the base need for reform itself. They write, “Benchmarking countries of the Euro area periphery against these criteria suggests that there is a reasonable likelihood of them successfully undertaking such reform.“ Meanwhile, TD Securities analysts feel that broadly, weak price action this week suggests a potential slide in EUR/USD to the 1.28/1.29 area. They write, “US data releases are likely to have a softer ring to them overall today but the real focus will be on Fed-speak from Bullard at 12.30ET.”


Brown Brothers Harriman analysts note that japanese PM Abe has started his visit to the US to meet President Obama and while the question of JPY will be on the agenda, they feel that Abe will have a number of issues on his list, ranging from regional security and access to US shale. Conversely they feel that Obama may press Abe to participate in the US-led Pacific area trade agreement (TPP) in contrast to the Chinese led equivalent which excludes the US. TD Securities analysts feel that renewed market volatility and uncertainty from central banks have provided a stronger bid for the JPY today, which has been the best performing currency on the day.


Ulrich Leuchtmann of Commerzbank comments that when analysis the effects of previous rounds of QE, there is not much evidence that liquidity had found its way through to households and nonfinancial corporations and that the signal for further QE, may just be a ploy to put pressure on the pound in order to help support the economy. Danske Bank analysts comment that this morning GBP/USD dropped below 1.5150 and reached the lowest levels since 2010. In their view, Sterling is a perfect storm in the making and they expect the risk of further easing by the BoE and a dismal growth outlook to weigh on GBP.


Michael Hartnett, Chief Investment Strategist at BAML recommends buying back the US Dollar. He notes that stepping back from the short term noise, one of the most impressive performances in recent months has been that of the USD. He writes, “ No longer correlated with volatility, the dollar has thrived as risk appetite has surged, yet another indication that the "Era of Deleveraging" is behind us.

Brown Brothers Harriman analysts disagree with the interpretation that the FOMC minutes increased the likelihood that QE ends early as many voices that were picked up in the minutes are not voting members. They expect QE to continue through Q2 and probably Q3 before possibly tapering off toward the end of the year.

Ulrich Leuchtmann of Commerzbank comments that he has been, and remains a long term USD bull, primarily because the Fed has much more scope than other central banks (in particular the ECB) and is able to act with much greater flexibility and appropriately in the recovery. Looking at the recent FOMC minutes within the context of US monetary policy, he comments, “In the end there is now a realistic chance that reason prevails.”

Sebastien Galy of SocGen notes that the spinning top of risk taking is slowing down with the Fed hitting the breaks. Nonetheless, he feels that the underlying economic story remains mixed giving a neutral impulse. he writes, “A large US retailer published better than expected numbers but indications are that those with lower disposable income have reacted negatively to an automatic wage tax increase and higher oil prices.” He is looking to see more evidence of this gasoline effect today with the CPI while on the supply side, it seems that the recovery continues (Philly) and most likely the housing market at a subdued pace. For a more pronounced correction he feels that we will need the Italian elections to deliver a stability unfriendly outcome.

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