Greek deadlock still unresolved, but the euro rose and could strengthen further in the event of a positive outcome. The BoE has expanded the APF and Wednesday’s Inflation Report will contain the new growth and inflation projections. ..…
The latter should create the conditions for a correction of the pound on a 1m-3m horizon. The yen proved sensitive to the evolution of market sentiment: downside reversal already under way… as long as the Greek crisis is solved.
The Swedish central bank will meet on Wednesday: underperformance of the Swedish krona against the Norwegian krone, with or without a rate cut. The Reserve Bank of Australia surprised the markets by leaving rates unchanged: AUD stronger, but risks persist.
EUR – The euro gradually appreciated this week, in step with progress towards a deal on Greece being struck. The exchange rate rose from EUR/USD 1.30 to 1.33. It stopped at the latter level, however, when the Eurogroup decided to postpone a final decision until next Wednesday, following parliamentary approval by Sunday of the Greek government’s proposal. The euro dropped somewhat on the postponement, retracing to 1.32. If a (positive) solution is reached by the end of next week, there could be room for a further strengthening towards 1.34-1.35. Resistances at 1.3322 – 1.3354 – 1.3386 – 1.3434 – 1.3487 – 1.3521 – 1.3548. Technically, upside should remain restricted to within the EUR/USD 1.34 area, but as the Greek deadlock isproving more complex than expected, any upside reaction of the exchange rate might prove sharper. The ECB has left rates unchanged and may not cut them any further. This could appear to be a supportive factor for the euro, but – barring positive surprises on the growth front – will not shield the single currency from the risk of a pullback to (just) below 1.30. If the Greek crisis becomes more complex, rather than reaching a solution, the euro would risk shedding this week’s gains, returning to 1.30 or just under (key support at 1.3026).
GBP – Sterling tracked the euro and also rose against the dollar, from GBP/USD 1.57 to 1.59. However, the UK economy provided no grounds on which to prospect a further strengthening of the pound against the dollar. In fact, the BoE sent signals pointing to an at least temporary correction. As expected, the la Bank of England left the bank rate unchanged at 0.50% and expanded the APF by GBP 50Bn. In its press release the BoE forecasts that based on its new projections (to be published in the inflation report next Wednesday, 15 February) growth should prove weak in the short term, and strengthen gradually in the course of the year. The strengthening will be guided by (1) monetary stimulus currently in place, and (2) a slight recovery in real household incomes, thanks to the expected drop in inflation. However, the risks to growth are skewed on the downside, due to (1) restrictive credit conditions, (2) the fiscal consolidation under way, and (3) the problems afflicting the euro area. Inflation is expected to drop sharply in the short term, and to continue declining subsequently – also in light of still rather high levels of spare capacity. Next week’s inflation report will shed light on whether there is a margin for a further expansion of the APF in the months ahead. In our opinion the BoE’s statement has created the conditions for a short correction phase for the GBP/USD exchange rate on a 1m-3m horizon, with a return towards the GBP/USD1.55-1.50 range.
JPY – The yen unexpectedly showed sensitivity to easing risk aversion, in step with the progress made in Greece towards the achievement of a deal. It then weakened somewhat, from USD/JPY 76 to 77. A positive outcome of the Greek deadlock would allow a further brightening of market sentiment and – in that case – the decline of the yen, for all its moderate entity, may represent the start of the long-awaited downside reversal.
AUD – Contrary to consensus expectations for a cut, the Reserve Bank of Australia left rates unchanged at 4.25% on Tuesday. The initial reaction of the AUD was a strengthening (against the US dollar). The exchange rate rose from 1.06 to 1.08 AUD/USD. However, it failed to rise above that level. A historical high was reached in the AUD/USD 1.10 area in July 2011. Therefore, some saturation is observed near those levels. The RBA made it understood that the decision was prompted by a slight improvement of the overall scenario, both at the domestic and, most importantly, global levels. However, it explicitly said that in light of the favourable inflation scenario, it is ready to cut rates again if demand conditions show signs of weakness. As a result, we confirm our expectation for a weakening of the AUD this year, acknowledging however the existence of upside risks to our scenario (i.e. central projections for the AUD/USD exchange rate may be somewhat undervalued).
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department