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European Morning Wrap: Central banks with a twist of Italy

FXstreet.com (Barcelona) - Central banks will be getting almost all attention this week and the main focus of this morning’s institutional reports lies on them, with a little twist of Italy.

EUR

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ, feels that so far there has been little evidence of broader contagion of the Cypriot situation to the rest of the Eurozone, which has helped to limit Euro downside in the near term. “We expect that the ECB will acknowledge at their policy meeting this week that the pace of economic recovery in the Eurozone is still proving disappointingly slow which will help to dampen upside potential even if Cyprus concerns continue to ease. However we do not expect the ECB to explicitly signal that a rate cut is imminent. ECB President Draghi will no doubt be questioned about developments in Cyprus to which he is likely to attempt to reassure investors that circumstances were unique”, he said. Emmanuel Ng of OCBC Bank believes the market, particularly the EUR/USD, will be headline driven ahead of the ECB meeting.

Still demanding caution is the Italian political context in which Bersani failed to form a government, pushing Napolitano to assign the task to work on a policy agenda to ten “wise men”. Nomura economist Silvio Peruzzo considers such move as “market friendly”, but the fact is that there is still no government a month after the election and all scenarios are still plausible, including new elections. The new parliament is likely to start pro-growth measures, including the payment of pending commercial debt of the public administration, which could mitigate loss of confidence in the short term as investors could wrongly conclude this means that the country is still operational.

JPY

One of the most important events this week is the BoJ policy meeting on Thursday and Emmanuel Ng of OCBC Bank said that the market has already priced in its expectations regarding potential additional monetary accommodation and despite BOJ Governor Kuroda continuing to spout the requisite dovish rhetoric. Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ, blamed Japanese PM Abe for some of the JPY strength because of a statement in which he said the BoJ shouldn’t pursue a 2.0% inflation target “at all costs” and fail to achieve it should global conditions change. He is quoted as saying, “What is important is to aim steadily for the target”. The BoJ is expected to announce increased purchases of long-term JGBs likely combining purchases under the Asset Purchase Programme (APP) and rinban operations, according to the OCBC Bank. Current consensus expectations are for the BoJ to raise the total monthly purchase amount of JGBs from the current rate of just over JPY4.0 trillion towards JPY5.0-6.0 trillion.

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