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Fundamental Afternoon Wrap: Italian horror on the horizon

FXstreet.com (Barcelona) - An attention switch from Cyprus to Italy as well as preparations for Thursday’s BoJ policy meeting are the main focus of this morning’s institutional reports.


Brown Brothers Harriman believe that when investors have managed to look beyond Cyprus, Italian politics seem to be the next worry on the horizon, as there are worrisome signs in the real economy and the financial sector: “The March manufacturing PMI (44.5) is the lowest since last August and the forward looking orders slumped since last May. Output and employment are at seven-month lows”, they wrote, adding that the notable exception to the general reduction of Target2 imbalances was in Italy where liabilities rose by EUR 28bln, the largest increase in a year and reversing the improvement seen over the past six months. Also, the Bank of Italy increased its borrowing from the ECB for the first time since last July. “Without putting too fine of a point on it, these figures point to increasing financial strains in Italy”, BBH analyst concluded.

Still in Italy, banking institutions observe the locked in stalemate in politics. Sebastien Galy, Senior FX Strategist at Societe Generale, wrote that President Napolitano is still trying to get Bersani and Berlusconi to keep talking in the hopes that it will eventually result in a coalition government, but 5-Star Movement’s Grillo has already rejected any chance of being part of the government. “Our worries about Italian economic policymaking, or the lack thereof, feed into our broader worries of another Eurozone shockwave in coming months”, wrote Galy.


Societe Generale analysts are inclined to expect the BoJ to deliver something big, in in line with market speculation. “BoJ policy looks like an implicit SNB still floor so that crushing vols below say 90 would be the rational decision. At the same time, the market is generally unwilling to sell tail risks”, he wrote in regard to USD/JPY trading. Nomura Strategist Yujiro Goto indicated uncertainties about BoJ policy tools, as Kuroda is expected to change the framework significantly. In short, the possible policy options are: 1) the consolidation of two JGB buying operations (APP and Rinban), 2) scrapping the banknote rule, 3) further increase in asset purchases (including risky assets such as ETFs, REITs and longer-term JGBs), 4) changes in communication strategy, and 5) an earlier start of open-ended asset purchases.

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