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Fundamental Morning Wrap: Italian stalemate Al fresco

This morning´s institutional research sees most focus fall on the ongoing Italian situation, with no significant signs of a break through emerging at all, so the deadlock is expected to continue for some time to come, contributing to EUR softness ahead. Looking to the UK, there is indecision over whether a further bout of QE is on its way and in Japan, nominee BoJ Governor has issued a war cry in the battle against deflation.

EUR/USD

Michaela Moran of BAML notes that two factors are driving European sentiment this monring. Firstly, Italian politically instability, and secondly EU GDP figures were more disappointing that bearish forecasts. However, she is expecting euro-area GDP growth to return to positive numbers in the second half of the year, consistent with a slowly healing economy. Marc Chandler of BBH notes that even in the best of conditions, namely Berlusconi´s last landslide victory, it still took weeks to form a government, which doesn't bode well for the current situation in Italy. Further, the inexperience of Grillo´s 5 star Movement adds further uncertainty to the mix.

Lee Hardman of BTMU note that the Euro remains under pressure against the dollar due to the Italian election and he adds that President Napolitano is exploring the possibility of putting together a coalition between the centre-left and centre-right parties with neither Bersani nor Berlusconi becoming the Prime Minister. Danske Bank analysts however report that Bersani insists that he will form a minority government but no colour on how he will realistically do it.

Looking ahead to this week's ECB meet, Mark Wall and Gilles Moec of Deutsche Bank are expecting the council to feel that the accommodative monetary policy stance is still broadly correct. However, they see the risk as being tilted more in the direction of easing of policy, not a rate cut but rather a non-standard, ´credit-easing´type policy within the next few months. Kit Juckes of SocGen adds that CFTC positioning saw EUR turn net short again and that from a technical perspective, the big level to watch today is 1.2970 below.

GBP/USD

Michaela Moran of BAML is expecting a very close UK QE decision in March following the surprisingly dovish 6-3 vote to leave QE on hold in February, our central expectation, downgrade and deterioration of UK economic fundamentals. Mark Wall and Gilles Moec of Deutsche Bank note that BoE MPC members discussed various topics this week including the possibility of further “prolonged” QE, negative rates and further financial support for SMEs. However, they add that recent FX moves have received much attention as has the inflation target and while there are risks, they expect no more QE in March. Kit Juckes of SocGen notes that Sterling weakness looks set to continue and that CTFC positions remain net short.

USD/JPY

Marc Chandler of BBH note that there are two improtant developments in Japan which may get overlooked by short term western focus on Italy and the US sequester. Firstly he sees that deflationary forces have tightened its grip on the nation and secondly, portfolio flows warn that the old recycling problems may have returned. Lee Hardman of BTMU notes that last night BoJ nominee Kuroda made a Dragiesque commitment to do “whatever it takes” to defeat deflation, citing a two year target for the 2% benchmark, by default indicating that a strong campaign of BoJ easing lies around the corner. Jim Reid of Deutsche Bank adds that Kuroda was critical of the BoJ´s previous efforts, saying "(the BOJ) is not doing enough in terms of the size of its asset purchases or the range of assets being bought”

Macro

Jim Reid of Deutsche Bank notes that the risk off sentiment of the market today was enganced following measures by the Chinese Government to control real estate speculation, namely in the form of two measures being; raising the down payment ratio and a 20% profit tax on price differentials between selling price and purchase prices on homes. Looking to the US, Kit Juckes of SocGen comments that he can´t shake the feeling that the idea of fiscal cuts is quite palatable for US politicians, and in a game of legislative chess, both sides are happy to let the cuts happen while blaming the other side.

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