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Fundamental Morning Wrap: Korea and Gold in focus

FXstreet.com (Barcelona) - This mornings institutional research has a distinctly alternative feel today, with the majority of focus edging away from the traditional majors and concentrating on Gold and event on the Korean Peninsula. Otherwise, EUR and GBP return to the fore with IMF forecasts casting a shadow on developments ahead.


Danske Bank analysts are very negative about GBP as they believe FX markets are underestimating the amount of easing that the incoming BoE governor Mark Carney will introduce. Derek Halpenny of BTMU notes that in the IMF´s recent predictions, the UK came out with a 0.3ppt downward revision to both 2013 and 2014 growth levels to now stand at 0.7% and 1.5% respectively.


Danske Bank analysts note that the Euro has recovered the last 24 hours and is now at the highest level against the dollar since February this year. The combination of Japanese asset managers moving into European bonds, risk-on, Draghi ruling out aggressive easing and stretched positioning are probably all factors supporting the euro. However, Derek Halpenny of BTMU notes that the recent IMF growth projections will have made uncomfortable reading for Eurozone policy makers.


Derek Halpenny of BTMU believes that the sudden drop in Gold is potentially indicative of the changing financial market dynamics and would concur that it doesn’t signal a severe period of risk aversion. He adds that the trigger for the move may have been the BOJ QE program which prompted Japanese retail selling of gold as gold hit a record high in yen terms and confirmed again the breakdown in the QE-gold link. Jim Reid of Deutsche Bank thinks that other real assets will likely perform better than Gold over the medium to long term from this still elevated starting point but that if we really see a money printing surge in the years ahead Gold will probably go back towards bubble territory again for a brief period. He writes, “So not great long-term value but an asset class that is prone to large upward spikes if the money creation period continues for some time as we expect it will.”


Khoon Goh of ANZ recommends going long Won on the unwinding of geopolitical risk premium. He notes that though North Korea continues to make threats towards the South, it is hard to see how much further tensions can escalate from here, short of an actual conflict developing. He believes markets are starting to take the view that the worst is over, and that the geopolitical risk premium will gradually unwind. He writes, “Given that market positioning is still short KRW, there is scope for further gains in the won as these positions get squared up. Seasonal factors also support a rebound in won during the remainder of April.” ING analysts see the BOK’s shortfall on its inflation targeting mandate as evidence that monetary conditions are tight, which keeps them positive on long-dated KTBs. Jim Reid of Deutsche Bank notes that The KOSPI (-0.1%) underperformed after news that North Korea has rejected South Korean business owner’s requests to visit the Gaeseong joint industrial zone, with North Korea said that talks with the US are possible once it has sufficient nuclear deterrents to ward off an attack.

Forex Flash: BoE should focus its efforts on supporting credit growth rather than extending QE – TD Securities

The April meeting minutes came in largely as expected, with the MPC voting 6-3 in favor of unchanged asset purchases (and 9-0 in favor of unchanged rates), with Fisher, Miles, and Governor King continuing to prefer a £25bn extension of QE for the third meeting in a row, and not a single MPC member changing his vote from the prior month. TD Securities analysts found interesting the mention that the “Committee also saw merit in possible extensions to the FLS that would boost lending further”: “This is in line with what we have been saying for some time, that further stimulus from the BoE is more likely to come via FLS or another program that is targeted toward expanding credit, rather than more QE. With UK rates still quite low, that would likely be more effective at fixing what aids the UK economy right now, rather than using a blunt tool like QE”, wrote analyst Jacqui Douglas, adding that today’s minutes just reinforced the continuing data-dependent nature of the BoE’s QE decision.
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Forex Flash: Rebounding Yen crosses send USD/JPY higher - OCBC Bank

Emmanuel Ng of OCBC Bank notes that rebounding JPY crosses helped send USD/JPY higher again on tuesday, although he remains somewhat neutral on the pair pending further developments on the risk appetite front.
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