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Fundamental Morning Wrap: Eurogroup Gaff causes investor panic

FXstreet.com (Barcelona) - This morning´s institutional research has made way on the center stage for Japan to join Cyprus in focus. Commentary from the new Japanese BoJ Gov. Kuroda has continued with the dovish theme while in Europe, Eurogroup chair Dijisselbloem had a foot-in-mouth moment which had to be sharply retracted, after he implied that the Cypriot model would be applied to future European bailouts.

EUR

ANZ strategist Andrew Salter is expecting EUR/AUD to rally off the back of five key factors; ultimately the market will come to realise that Cyprus was in fact a special situation; an asymmetry in the reaction of EUR and AUD to global growth; the risk of a policy response if AUD appreciates but not EUR; new dynamics in China; and, the coalescing of these factors at extended levels. Geoffrey Yu and Gareth Barry of UBS note that despite all the political debris, markets are not yet willing to aggressively sell the Euro, in light of the “whatever it takes attitude” assumed by the ECB. Also, they reiterate that investors look to be releasing the Cyprus was indeed a special case. Lee Hardman of BTMU notes that comments from the Eurogroup chair Dijisselbloem, who said that the private sector should be bailed in going forward, has eroded investor confidence that the European authorities will be able to put in place an effective banking union to help preserve financial stability in the euro-zone and euro.

Danske Bank analysts note that the Cyprus bailout deal increases fears of the potential effects of capital control and the risk of contagion across Europe. Jim Reid of Deutsche Bank comments that regardless of Dijisselbloem´s subsequent clarifications, investors are getting increasingly conscious of the relentless inconsistency over future rescues. He asks, “Is the ESM now redundant?”

JPY

Geoffrey Yu and Gareth Barry of UBS note that the newly installed BoJ Governor, Kuroda has stuck to the dovish script, causing a 40 pip bounce in USD/JPy during his commentary which reiterated known positions. Eventually the pair retraced, but with the end of the japanese fiscal year and the BoJ meeting due soon, they see this period as being a buying opportunity with 100 as a target. Lee Hardman of BTMU adds that Gov. Kuroda commented on the 2% inflation target, stating that “it is to be achieved “as soon as possible” and that “achieving it in two years is something that I have in mind, and will take responsibility to achieve that obligation”. Danske Bank analysts are targeting USD/JPY at 108 within 12 months time in line with a sustained continuation of monetary policy looking forward.

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