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27 Mar 2013
Fundamental Morning Wrap: Rumor of an Italian downgrade ahead of coalition talks disturbs investors
This morning´s institutional research focused on more Eurozone troubles after Dijsselbloem’s comments, as there might be more to come soon in Italy and Cyprus. Japan is also being eyed ahead of the next BoJ meeting, where new Governor Kuroda could start the awaited policy easing show or disappoint investors.
EUR
The EUR/USD has fallen under 1.28 after the EMU confidence report today, but such pressure on the pair still finds Dijsselbloem’s comments about Cyprus and capital controls as well as rumors once again of an Italian downgrade to come today as main contributors, according to TD Securities analysts. “There remains potential for headline risks, but the bigger stories in Cyprus and Italy should be tomorrow when Cypriot banks are due to re-open and Bersani due to report back to President Napolitano tomorrow regarding the progress of coalition negotiations”, said Marcin Budkiewicz, strategist at TD Securities, expecting the announcement by the ECB that the take-up in the 3m LTRO amounted to just €9bn to help sentiment as it compares favorably against €15bn maturing from the previous tender. “The number of bidders in the 3m LTRO was up from 36 in Feb auction to 46 today, so there was some broadening of desire for liquidity, with €800m more desired now relative to the Feb auction. But that's still in line with auctions we saw at the start of the year when conditions were much better, and is still a net withdrawal of €6bn in liquidity from the system (as €15bn was maturing) at the end of the day so a smaller ECB balance sheet”, they Budkiewicz continued.
The team at BBH see the US-German 2-year interest rate differential being driven by the awaited re-opening of Cypriot banks tomorrow and the unresolved political situation in Italy. Also from Italy is economic news going from bad to worse, just like what is seen in Spain’s collapsing domestic demand.
JPY
On the JPY front, there is huge anticipation that Kuroda will kick off his term as BoJ Governor with a significant step-up in policy stimulus at the April 3-4 meeting and there are reports saying that the BoJ is preparing to merge its two JGB buying programs into one, with the intention of making the scale of the BOJ's easing programs more transparent. “The biggest consequence of combining both programs though is that it could give the BoJ far greater freedom to purchase a wide range of tenors. By design, APP purchases are concentrated at the very front end of the JGB curve in the 1-3y sector, whereas Rinban operations can buy all the way out to the 30y point”, wrote UBS analyst Gareth Berry. “A combined program is likely to be more Rinban-like in its freedom to buy across the curve. That means lower JGB yields at the long end, and a higher USD/JPY seem likely as a result”, he added. Analysts at Rabobank suggest central bank buying of longer dated JGBs (to include 5 yr bonds) and also increased purchases of riskier assets. “Bearing in mind the huge amount of attention that has surrounding the appointment of Kuroda and his reassurances about the capacity of monetary policy to stimulate growth and inflation, the obvious question is whether the BoJ can avoid disappointing the optimists”, wrote analyst Jane Foley, adding that Japan needs more structural reforms to re-ignite growth potential and that the government should be concentrating its efforts in this direction. “There is also a widely held view in many other countries that have used QE that that monetary policy has its limitations. Kuroda has proved that he can talk the talk but achieving 2% inflation in Japan is set to be a difficult task. Near-term we would be sellers of rallies in USD/JPY”, Foley concluded.
EUR
The EUR/USD has fallen under 1.28 after the EMU confidence report today, but such pressure on the pair still finds Dijsselbloem’s comments about Cyprus and capital controls as well as rumors once again of an Italian downgrade to come today as main contributors, according to TD Securities analysts. “There remains potential for headline risks, but the bigger stories in Cyprus and Italy should be tomorrow when Cypriot banks are due to re-open and Bersani due to report back to President Napolitano tomorrow regarding the progress of coalition negotiations”, said Marcin Budkiewicz, strategist at TD Securities, expecting the announcement by the ECB that the take-up in the 3m LTRO amounted to just €9bn to help sentiment as it compares favorably against €15bn maturing from the previous tender. “The number of bidders in the 3m LTRO was up from 36 in Feb auction to 46 today, so there was some broadening of desire for liquidity, with €800m more desired now relative to the Feb auction. But that's still in line with auctions we saw at the start of the year when conditions were much better, and is still a net withdrawal of €6bn in liquidity from the system (as €15bn was maturing) at the end of the day so a smaller ECB balance sheet”, they Budkiewicz continued.
The team at BBH see the US-German 2-year interest rate differential being driven by the awaited re-opening of Cypriot banks tomorrow and the unresolved political situation in Italy. Also from Italy is economic news going from bad to worse, just like what is seen in Spain’s collapsing domestic demand.
JPY
On the JPY front, there is huge anticipation that Kuroda will kick off his term as BoJ Governor with a significant step-up in policy stimulus at the April 3-4 meeting and there are reports saying that the BoJ is preparing to merge its two JGB buying programs into one, with the intention of making the scale of the BOJ's easing programs more transparent. “The biggest consequence of combining both programs though is that it could give the BoJ far greater freedom to purchase a wide range of tenors. By design, APP purchases are concentrated at the very front end of the JGB curve in the 1-3y sector, whereas Rinban operations can buy all the way out to the 30y point”, wrote UBS analyst Gareth Berry. “A combined program is likely to be more Rinban-like in its freedom to buy across the curve. That means lower JGB yields at the long end, and a higher USD/JPY seem likely as a result”, he added. Analysts at Rabobank suggest central bank buying of longer dated JGBs (to include 5 yr bonds) and also increased purchases of riskier assets. “Bearing in mind the huge amount of attention that has surrounding the appointment of Kuroda and his reassurances about the capacity of monetary policy to stimulate growth and inflation, the obvious question is whether the BoJ can avoid disappointing the optimists”, wrote analyst Jane Foley, adding that Japan needs more structural reforms to re-ignite growth potential and that the government should be concentrating its efforts in this direction. “There is also a widely held view in many other countries that have used QE that that monetary policy has its limitations. Kuroda has proved that he can talk the talk but achieving 2% inflation in Japan is set to be a difficult task. Near-term we would be sellers of rallies in USD/JPY”, Foley concluded.