Article / 28 February 2013 at 9:17 GMT

BoJ appointments now clear, while EUR pokes resistance

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank

Abe makes his official nominations to replace the BoJ leadership, with the aggressive Iwata as deputy governor. Meanwhile, the Euro is trying to pretend that the Italian election didn’t happen – but it did.

As recently suggested by various leaks, Japan’s PM Abe nominated Haruhiko Kuroda as the next BoJ chief. He was perhaps considered in the middle of the spectrum of candidates, and what one Wall Street Journal article a few days ago called “out of the mainstream” as he may be more likely to shake things up due to his outsider status and long history of criticizing the Bank of Japan. Abe appointed an even more aggressive deputy governor, Kikuo Iwata, who has been an aggressive advocate for reflationist policies for many years. We can expect interesting rhetoric from him. The final deputy governor appointment was for a current BoJ operative Nakaso. Shirakawa steps down March 19. It was perhaps the nomination of Iwata as deputy governor that had the JPY weaker overnight (that and the market trying to brush off the implications of the Italian election and risk appetite springing back to life even before the Asian session).

Italian elections – basta?
Interesting to see EURUSD back close to the old support levels/now resistance levels around 1.3150 that prevailed just ahead of the Italian elections as the market tries to brush off the implications of Italy’s election earthquake. Grillo stated yesterday, to no great surprise, that he is not interested in forming a coalition, as his express ambition is to act as a disruptive force rather than to govern. It will be fascinating to watch whether Berlusconi and Bersani can manage to hold their noses and form a grand coalition – perhaps the only hope for near term stability on the Euro question. In any case, no one will want to ally themselves with Monti, who is the scapegoat for Italy’s current economic weakness and as he is branded an EU apologist.

Italy’s bargaining position with the EU is actually rather compelling, as it would have the easies time, of all the major peripheral countries, simply walking away and relaunching the lira. It’s budget is close to a primary surplus and private debt levels are very modest as are total debt levels in its economy. This will not be a case of Italy simply requesting aid via the OMT, because there is no way the country will submit to the heavy oversight and austerity rules that would be required in such an event. Either Germany/the core will have to move toward Italy at some point as a new deal is put together, or we are back to pondering systemic crisis scenarios or at least an Italy partial/full exit from the EMU scenario.

EURUSD is at a crossroads here in the 1.3150 area overnight, it being the key support on the way down ahead of the Italian elections. It’s hard to believe that the pair can work back higher after the uncertainty generated by the Italian elections, but the sense of calm at present should be rather disquieting for bears, and we have come a long way in very short order, so a squeeze can by no means be ruled out. The short-termers can remain bearish if we remain below the 1.3150/60 area, but if a squeeze develops, the 1.3300 area could quickly come into play and even larger retracement levels like the big 0.618 retracement up above 1.3400 – which would be the possible scenario if we see a grand coalition forming in Italy. So, yes, the chart structure appears capped and the bull market over, but the risk of a considerable throwback rally remains. To the downside, the 1.3020/00 area support is the important gateway to further declines.


Looking ahead
The budget sequester circus is upon us once again, as tomorrow’s deadline for the automatic budget cuts is fast approaching. The consensus has moved toward believing that the cuts will take place, which could lean against the near term prospects for the US economy and corporate earnings, but last minute deals are most certainly not unheard of in Washington in recent years, as we all know.

We have the final US regional manufacturing surveys up today, as well as a revision to Q4 GDP that is likely to flip the number back into positive territory from the marginally negative initial estimate. In Asia, Australia and China kick off the world manufacturing PMI day, with the US ISM to follow tomorrow.

Economic Data Highlights

  • Japan Feb. Markit/JMMA Manufacturing PMI out at 48.5 vs. 47.7 in Jan.
  • Japan Jan. Industrial Production out at +1.0% MoM and -5.1% YoY vs. +1.5%/-4.9% expected, respectively and vs. -7.9% YoY in Dec.
  • New Zealand Feb. ANZ Business Confidence rose to 39.4 vs. 22.7 in Jan.
  • UK Feb. GfK Consumer Confidence out unchanged at -26 as expected
  • Switzerland Q4 GDP out at +0.2% QoQ and +1.4% YoY vs. 0.0%/+0.9% expected, respectively and vs. +1.2% YoY in Q3
  • Germany Feb. Unemployment Change out at -3k vs. 0k expected and -14k in Jan.
  • Germany Feb. Unemployment Rate out at 6.9% vs. 6.8% expected and 6.9% in Jan.

Upcoming Economic Calendar Highlights (all times GMT)

  • Euro Zone Jan. CPI (1000)
  • Switzerland Jan. CPI (1000)
  • Germany Feb. preliminary CPI (1300)
  • US Fed’s Lockhart to Speak (1315)
  • Canada Q4 Current Account (1330)
  • US Q4 GDP revision (1330)
  • US Weekly Initial Jobless Claims (1330)
  • US Feb. NAPM Milwaukee (1400)
  • US Feb. Chicago PMI (1445)
  • US Weekly Bloomberg Consumer Comfort Survey (1445)
  • US Feb. Kansas City Fed Manufacturing Survey (1600)
  • Australia Feb. AiG Performance of Manufacturing Survey (2230)
  • Japan Jan. Jobless Rate (2330)
  • Japan Jan. Overall Household Spending (2330)
  • Japan Jan. National CPI (2330)
  • China Feb. Manufacturing PMI (0100)
  • US Fed’s Evans to speak (0100)
  • China Feb. HSBC Manufacturing PMI (0145)


eskiln eskiln
Just read your article. I'll keep an eye on the developments in Eurusd and Eurjpy. I still think the Italian issue will loom. Several candidates that won't work together in a coalition.
vng vng
what's the outlook for EURGBP?
Juhani Huopainen Juhani Huopainen
Very nice points on Italy. Seems like the ECB's tight spot vs. Italy's sweet spot is now generally understood. Today's EZ inflation figures and lending contraction (as I wrote earlier) give an excuse for the ECB to ease. But will they / won't they.. Key now is ECB's reaction. Will their reaction function be political, or will it be nominal stability-based.
fxtime fxtime
I am amazed at how little concern there is in world markets about the automatic USA budget cuts that will occur tomorrow....clearly the USA feel they can absorb these cuts without affecting consumer confidence and consumption whilst obviously reducing government debt.
Juhani Huopainen Juhani Huopainen
I think the concerns are there alright, but perhaps they are in the prices, and on the other hand it is seen any trouble will just lead to Fed postponing the decision to decrease QE.


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