Fundamental Afternoon Wrap: G(20)roundhog day as G20 set to fall in line with G7

With the weekend almost upon, we have taken a look across institutional research released this afternoon and note one distinct theme, namely that the G20 is unlikely to deviate too far from the G7 consensus and Japan will largely avoid being singled out as a currency manipulator. Elsewhere, Europe is noted as being on a long, slow road to recovery, while the UK´s economy appears to be going from bad to worse.

EUR/USD

Michaela Moran of BAML notes that the Sub-prime and Eurozone debt crisis have had a damaging effect on European Investment, which in turn has limited Eurozone´s potential to grow and recover without reforms aimed at boosting investment and productivity. She feels that overall Deflation risks remain elevated and that while there will be a steady recovery, low growth will persist until 2015 at least. Brown Brothers Harriman analysts note that EUR/USD has continued to track the short term interest rate spread between US and German 2 year bonds, commenting that at 9bp, “is the biggest US premium since January 16.” Elsewhere, Jane Foley of Rabobank highlights Draghi´s skill at the timing of his comments last week, which she feel demonstrate an acute understanding of market psychology. Nick Bennenbroek of Wells Fargo notes that comments from European Central Bankers are mixed but dovish on balance, acknowledging that the exchange rate is important for the growth and inflation outlook.

GBP/USD

Brown Brothers Harriman analysts note that following another bout of poor data, Sterling has made a new low, bringing its losses against USD since January 2nd to 5.6%. Meanwhile, Phillip Rush of Nomura comments that dovish rhetoric alongside a hawkish inflation report forecast removed any idea that the BoE is a proper inflation targeting central bank. He writes, “Inflation remains sticky, but is not alone in squeezing real incomes and thus retail sales.”

USD/JPY

Brown Brothers Harriman analysts feel that the G20 statement is unlikely to be that much different from the G7 statement previous and Japan will avoid being singled out. Meanwhile, they note that USD/JPY has traded below the daily 20 MA for the first time since the Japanese election was announced in November 2012. Jane Foley of Rabobank is expecting a little Yen weakness at the start of next week, as the Japanese fail to get their knuckles wrapped by the G20. Further, TS Securities note that JPY is the best performing major currency on the day, rising modestly against a generally stronger USD and the JPY bounce is driving down short-term JPY risk-reversals. Nick Bennenbroek of Wells Fargo notes that the Yen fell on reports the draft G20 statement omits the G7 view that exchange rates shouldn’t be a target of policy.

Macro

Brown Brothers Harriman analysts note that absent the French and Brazilians who are yet to speak, the consensus view at the G20 appears to be unified and not far removed from the previous G7 statement. Jane Foley of Rabobank echoes this point noting that many nations are falling into line with the previous G7 report, with the official communiqué expected to be especially bland. TS Securities join the chorus, commenting that while the G20 may add a little more colour to the G7 statement, sentiment is widely expected to be the same.