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Fundamental Afternoon Wrap: Stagnant markets see retrospective focus

FXstreet.com (Barcelona) - This afternoon´s institutional wrap see´s focus evenly split between GBP, EUR and JPY today, on a day where markets have kept to tight ranges. The UK downgrade by Fitch, the re-election of Italian President Napolitano and the G20 blind eye to Japanese monetary policy are the top issues of today.


BBH analysts note that late on Friday, Fitch took the step to downgrade UK debt from AAA to AA+. They note that this follows a similar move by Moody´s in February, with Fitch arguing that vulnerability to adverse developments and fiscal shocks is not consistent with an AAA rating. Additionally the BBH team note that UK Gilts are trading a bit heavier today, and their models are anticipating scope for further pressure on the UK´s ratings ahead. The BAML European economics team ask whether more BoE interest rate guidance would really help? They note that the minutes from the BoE´s latest meeting showed that they again voted 6-3 to leave QE on hold at GBP 375bln, in line with expectations. They write, “Looking further ahead, in August the BoE will set out an assessment of the merits of giving interest rate guidance. While more guidance might help improve transparency, it might not change rate expectations compared with their current approach, in our view.”


BBH analysts note that Italy took the unprecidented step to give President Napolitano another term in office. He favours the establishment of a new (coalition) government rather than a return to the polls. Although the path seems convoluted, they continue to see a new government with a limited political agenda (rather than a technocrat government) as the most likely outcome. Meanwhile, they add that PD leader Bersani resigned after failing to gather enough support for Prodi as President. They write, “Many observers who are surprised of Berlusconi's success in Italian politics often fail to appreciate the ineptitude of his opposition. Bersani snatched defeat from the jaws of victory in the February election and has played his hand poorly since.” Jim Reid of Deutsche Bank notes that Napolitano´s election in itself represents the utter fragmentation of the Italian political scene and that he himself was reluctant to become the first President to be given a second 7 year term.


Jim Reid of Deutsche Bank notes that over the weekend, the G20 wrapped up, and the absence of official criticism of Japanese monetary policy was the most telling take home. He adds, “Shortly after the meeting the BoJ’s Kuroda told reporters that “Winning international understanding gives me more confidence to conduct monetary policy appropriately. We will continue our qualitative and quantitative easing for the next two years””. Meanwhile Rob Carnell of ING proclaims, “Hallelujah! It’s raining Yen!”, noting that markets seem unsure of which way to turn. He writes, “Is liquidity about to be turned off as the Fed mulls downscaling QE? Or is such talk premature given the US slowdown and BoJ printing?”

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