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Fundamental Morning Wrap: Upside Down Under

A glance through the mornings institutional research puts AUD in the frame this morning as it looks like Italian situation has lost some of its initial ´momentum´ and entrenched negotiations look set to take place. Better numbers out of Australia indicate that AUD/USD may have bottomed within a range and that the RBA is unlikely to take further action. Elsewhere Abe officially nominated Kuroda, and Bernanke helped to soothe market tensions during his second testimony.

AUD

Andrew Salter of ANZ notes that a trifecta of factors suggest that AUD/USD is at the bottom of a range. these reasons include positive CAPEX data, RBA indifference around current AUD levels and large reserve managers holding AUD in their portfolios. He notes that he is long AUD/NZD to reflect this view. Lee Hardman of BTMU notes that the Australian dollar has also benefited from the release of more upbeat than expected capital expenditure expectations from the Australian mining sector, which points to a rise of 11% Y/Y in 2013/14. Further, he adds that It has also been reported overnight that recent RBA documents revealed that their internal and IMF models suggest that the Australian dollar is overvalued by around 4-15%, with up to 34 central banks holding the Australian dollar as part of their foreign exchange reserves. Gareth Barry and Geoffrey Yu of UBS comments that the fundamental boost for AUD suggests no imminent need for the RBA to provide additional stimulus, and their Australian economics team have stuck to their view that the cash rate has now bottomed at 3%.

JPY

Raymond Van der Putten of BNP Paribas notes that Japanese Industrial production strengthened in January by 1% m/m thanks to the pick up in the global manufacturing cycle in combination with the depreciation of the yen. Further, the Government nominated Kuroda for BoJ governor, with the task of pushing inflation to 2%. Danske Bank analysts feel that these nominations represent a formal shift in Japanese monetary policy and the purchase of Government bonds will be ramped up by the BoJ. Kit Juckes of SocGen feels that USD/JPY has now established itself in a clear range between 91-94.5.

EUR

Jim Reid of Deutsche Bank feels that the Italian political situation looks fairly fluid, with Grillo yesterday describing Bersani as a “dead man walking” and repeated that he won’t be joining any coalition. Meanwhile he adds that Finance Undersecretary Gianfranco Polillo said that a joint government between Berlusconi and Bersani is the only possible way forward. This point is reiterated by Lee Hardman of BTMU who comments that options look to be running out and the Center Left & Right parties may be forced to work together. Kit Juckes of SocGen feels that Italian yields will be closely watched today and despite the fact that yesterday's auction went smoothly enough, Italian 10 years still yield twice as any other G7 nation.

Macro

Michael Hartnett of BAML notes that politics and policy mistakes matter and that within the next 8 weeks, a big correction could take place which see the S&P 500 back to the 1300-1400 range depending on political developments in Europe and the US.He also adds that nowadays, Central Bankers and not politicians are the dominant price behind asset pricing and slowly interest rate policies are starting to work. Meanwhile, Kit Juckes of SocGen hails the magic of Bernanke, commenting that his performance yesterday helped turn risk sentiment 180 degrees. Gareth Barry and Geoffrey Yu of UBS add that Bernanke warned about the economic costs of political brinkmanship - in particular repeated episodes where Congress is unable to reach an agreement and adjustments take effect automatically. Again he recommended replacing the upcoming sequester with a smaller package introduced more gradually and then backloaded further out to compensate. Bernanke warned the Fed does not have tools which are powerful enough to overcome this year's fiscal contraction.

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