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Fundamental Morning Wrap: A Continental Breakfast and some Chinese Take Out

Following the drop in volume due to the bevy of fundamental flashpoints last week, institutional research has returned with a bang this morning, and a range of focal points. GBP is out, seemingly with little new colour until the pending budget and inflation note. Meanwhile, the market continues to digest Draghi´s performance on Thursday while the Italian downgrade on Friday night adds a new dimension to an already multifaceted paradigm. A similar amount of focus has been put on the US NFPs on Friday, following their surprising upside bounce and in Japan, the process of BoJ nominations is starting to gather momentum. However, the surprise of the day so far has been the attention placed on Chinese developments. We all know China is a rising power, and while the flurry of attention will likely not become a regular fixture just yet. It is noteworthy as a long term trend.


Michaela Moran of BAML has taken a look at Europe´s questionable stability and wonders whether there is much more that central banks can do. She highlights that the ECB is insistent on stabilisation and refuses to be swayed by recent market gyrations and downward forecast revisions. Further she adds that the bank came as close as it has ever been to forward guidance. Elsewhere, she recommends keeping an eye on Italian political developments, believing that Bersani could push forward and form a minority government should Grillo´s Five Star Movement remain uncooperative.

Derek Halpenny of BTMU notes that Italy was downgraded on Friday by Fitch. who cited the inconclusive election result and “non conductive backdrop for further structural reform” as key factors. He recommends keeping an eye on Moody´s who has Italy rated one notch above Junk. Jim Reid of Deutsche Bank continues with the Italian theme, noting that the Italian parliament will be holding its first session on Friday, after which formal consultations with President Napolitano on forming a new coalition government can begin. The Westpac strategy team feel that renewed focus on Italian politics, plus poor EZ growth momentum vs US metrics makes the Euro a sell on rallies towards 1.31 and they will only reconsider their view should spot hit 1.32.


Looking at Friday´s NFPs, Danske Bank analysts note that the better than expected numbers indicate that market expectations will start to price in an eventual QE exit from the Fed, although they have a distant 2014 as they expected time. Rob Carnell of ING believes that the near term reaction to Friday's numbers will be to sell the back end of the yield curve and for equities and the dollar to rally especially against JPY and GBP. Jim Reid of Deutsche Bank notes that in the US, the Senate will this week consider a bill that will extend the government's spending authority until September. Further, he adds that the Fed is scheduled to announce results from its annual bank Capital Analysis and Review on Thursday, detailing which US banks have the ability to pay dividends or buy back shares.


Derek Halpenny of BTMU notes that USD/JPY looks well supported following Friday´s encouraging NFP numbers and that a clear divergence is appearing between the US and other nations, like Japan specifically which is continuing to struggle. He adds, Kuroda’s nomination hearing for Governor in the Upper House of the Diet saw little new and largely comprised of a reiteration of previously known opinions and views about BoJ failings. Jim Reid of Deutsche Bank extends this view, and adds that Kuroda was cautious about the idea of scrapping interest paid on excess reserves at the central bank, saying that further debate on this subject was needed. The Westpac strategy team feel that USD/JPY is the most obvious way to play the strong dollar theme, with slightly positive carry and the combination of welcoming Japanese authorities against a hands off US approach.


Irene Cheung and Khoon Goh of ANZ note that all indicators are pointing towards a stronger Yuan. They see that the PBOC’s recent shift to a policy tightening bias and growing official concern over inflation pressures mean a stronger yuan will be part of the policy response. Further, they feels that liberalisation of the RQFII scheme and increased speculation of band widening could see even stronger selling pressure in USD/CNH. Meanwhile, Danske Bank analysts note that Chinese inflation climbed to 3.2% in February, up from 2% in January and likely had some Lunar New year distortions. Further they note that recent economic data from China has disappointed, with industrial production and retail sales slumping while fixed investments strengthened. They feel that this indicates that China is struggling to rebalance its economy from investment to consumption driven growth.

HSBC analysts believe that the Renminbi is on track to be a fully internationalised currency and the rapid pace of the internationalisation of the redback has taken the world by surprise. Further, it is set to become the third largest trade settlement currency by 2015 and likely to become convertible within 5 years. Tim Condon of ING believes that the reduced likelihood of spending shocks enables the PBOC to return to stabilizing money and credit growth as it did in the decade before the GFC.

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