Fundamental Morning Wrap: All roads lead to Rome

It´s been a quiet morning on the research front, perhaps due to the double barrel of UK GDP and Italian bond auctions coming into play today. While this morning has seen negative QoQ UK GDP, the muted reaction indicates that the result has already been priced in by the market amongst the reactionary melee of the downgrade. However, Italian debt auctions are the event in focus today, and are being seen as a litmus test for EUR/USD, which is currently bobbing away above the significant 1.30 level.

EUR/USD

Derek Halpenny of BTMU comments that todays key European event will be the 5 & 10 yr Italian debt auctions, made all the more important due to the current Italian instability and the increased correlations between the Italian/German 10 year spread and EUR/USD, a point also highlighted by Kit Juckes of SOcGen. Danske Bank analysts note that on the economic front Euro M3 and credit data is due and will be watched to see if previous softness was just a blip. Overall, they are not expecting to see too much EUR/USD downside, just yet.

USD/JPY

Derek Halpenny of BTMU notes the notable lack of progress in the BoJ appointment, instead commenting that PM Abe was able to pass the 2012 supplementary budget with 117-116 votes. He notes that while the DPJ were the opposition to the bill, the LDP managed to secure votes from almost every other party, hinting that Upper House deadlock may be slowly easing due to the wide spread popularity of the Abe administration. Kit Juckes of SocGen notes that there is a growing base of support for Kuroda to take the BoJ hot seat, but opposition to Iwata as his deputy. gareth Barry and Geoffrey Yu of UBS note that deep structural changes are taking place in the Japanese real economy which has disrupted the prevailing balance between supply and demand.

Macro

ANZ analysts note that a potpourri of forces are at play in the fx market at present. Despite the focus on Italy they highlight (a) the early signs of liquidity withdrawal in China; (b) whether Bernanke can keep the FOMC easy; as the main factors they are watching.

Meanwhile Athanasios Vamvakidis of BAML takes a look at the plight of Cyprus, the Eurozone´s forgotten crisis zone, and notes that a combination of money laundering concerns, Greek exposure, Low Corporate Tax Rates and occupied territories remain the issues at hand, penning back progress.

Derek Halpenny of BTMU notes that Bernanke´s speech yesterday gave a stern defence of QE as an important monetary policy tool in the currency crisis, a point supported by Lewis Alexander of Nomura who comments that a significant sector of Bernanke´s report focused on the weighing of benefits against costs of the policy, concluding that the former outweighed the latter.