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Fundamental Morning Wrap: Italy & LTROs dominate morning focus

A look around the mornings institutional research shows a heavy focus on Europe naturally, with LTRO repayment announcements looming and an Italian election which is starting to cause unease as markets digest the increasing probability that Berlusconi could remarkably return to power, again. Other news sees Japanese PM Abe meet President Obama.

EUR/USD

Michaela Moran of BAML comments that the current crisis is distinct from previous crisis episodes because this crisis affects a large set of European countries that are highly integrated via trade and financial channels, and, because the magnitude of economic policies implemented is unprecedented. Caroline Newhouse of BNP Paribas notes that though the German economy was actually weaker in Q4 2012 than expected, it should recover as soon as the first quarter of this year and even bounce back markedly over the period, thanks to a recovery in domestic demand as well as in exports.

Lee Hardman of the Bank of Tokyo Mitsubishi UFJ notes that outside of Germany whose economy appears to be rebounding in Q1, there is little evidence yet of the positive contagion ECB President Draghi has referred to with the sharp improvement in financial market conditions not yet feeding through significantly to the real euro-zone economy. He writes, “The surveys support our view that the euro-zone economy can’t handle a stronger euro and that the ECB may have to ease monetary policy again later this year if growth continues to disappoint.”

Lutz Karpowitz and Thu Lan Nguyen of Commerzbank comment that the Fed holds a lot of cards in determining EUR/USD near term direction but add that an ECB rate cut is not yet completely off the table yet and in this context the ECB projections are clearly very significant and as a result obviously also the current economic data. They write, “After all the ECB has hinted that it might take action again should the economic recovery remain below its expectations. Contrary to the US the ECB’s future approach therefore depends mainly on the economic data.”

Christian Lawrence of Rabobank comments that in terms of Eurozone government bond issuance, Spain showed a strong set of results but he still feels that this is being driven by a large amount of central bank liquidity in the system rather than an improvement in Spanish fundamentals, and major progress being made towards fiscal union in the Eurozone.

Geoffrey Yu and Gareth Barry note that the ECB will announce the repayment details for the second LTRO later this morning. They continue to add, “Since last July the euro is striving to ‘normalise’, and a part of the process involves greater sensitivity to frontend rates. EONIA levels have been essential in strengthening this relationship, and regardless of how the ECB truly feels about it, further withdrawal of excess liquidity via large LTRO repayments will be much sought after by euro bulls, as the currency seeks to avoid heading into the upcoming Italian elections on the back foot.”

USD/JPY

Michaela Moran of BAML notes that Japan has a trade deficit but a current account surplus, thanks to more than ¥14tn of income. Japan would still have a current account surplus even if the trade deficit (for goods) were to widen to ¥10-11tn. Lee Hardman of the Bank of Tokyo Mitsubishi UFJ notes that yen is also re-weakening overnight alongside the improvement in risk sentiment following comments from Kazumasa Iwata, a leading candidate to be the next BOJ Governor, reported by the Jiji press restating his proposal for the government and BoJ to set up a fund to buy foreign bonds. In his view it would not be intended to weaken the yen but help prevent a global financial crisis.

Lutz Karpowitz and Thu Lan Nguyen of Commerzbank comment that JPY has stood up very well recently considering Fed minutes and that the pair seems to have some upside potential at prices around 93.20. They note that Prime Minister Shinzo Abe is meeting US President Barack Obama in New York tonight and should these talks suggest that the US further supports the Bank of Japan’s expansionary approach that would be the perfect scenario for higher prices in USD/JPY.

Macro

Michaela Moran of BAML notes that there are plenty of speed bumps ahead for the world economy with the Italian elections, the nomination of a new BoJ governor and the US sequester all posing event risks within the next couple of weeks. She writes, “While we are more optimistic about the BoJ nominee, looming US fiscal cuts are likely to dampen 2Q GDP growth.” James Knightley of ING asks whether the global economic calendar is making an unlikely comeback, noting that the key European events will be the Italian election where uncertainty is rising in build up.

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