Central banks also in the spotlight next week. If the ECB, which is not expected to cut rates, fails to reassure the markets on its role in managing the euro area debt crisis, the single currency may drop back below..…
GBP – This week sterling decoupled somewhat from the euro against the dollar, and appreciated on the whole, rising from GBP/USD 1.56 to 1.58 (a level last seen at the end of November). The positive correlation previously shown by the GBP/USD and EUR/USD exchange rates was essentially slackened by economic data releases in the UK, namely the January manufacturing and services PMIs, which surprised on the upside, beating expectations. This will not make life easier for the Bank of England, which like the ECB will also announce its monetary policy decision next Thursday, 9 February. In line with consensus, we expect the BoE to expand the APF on occasion of this meeting, by GBP 50Bn, stepping up the amount appropriated for the purchase of assets from 275 to 325 billions. However, many expect a larger rise, in the order of GBP 75Bn. As we believe sterling to be overvalued above GBP/USD 1.55, and in light of its asymmetrical reactions to data (little/no downside reaction on poor data, strong upside reaction on positive data), a GBP 50Bn expansion of the APF should in any case push the pound down, at least back towards GBP/USD 1.55. If the increase is larger, then the expected depreciation could also be more significant (acceleration towards GBP/USD 1.54-1.52).
JPY – The yen strengthened this week, stopping just short of USD/JPY 76.00. This is a critical level, as it falls in the “intervention area”: on 31 October 2011, the Japanese authorities intervened at USD/JPY 75.35 to halt the appreciation of the national currency. Domestic concerns have increased in recent days over the risks posed by an excessively strong exchange rate. The main factor keeping upside pressures high on the yen is probably the uncertainty tied to the Greek deadlock. Should the situation deteriorate on this front, the exchange rate may breach USD/JPY 76.00 on the downside. This would not automatically trigger a BoJ/MoF intervention, as the critical factors would be the strength and duration of the movement. In any case, the authorities are ready to intervene if necessary. We stick to the view that positive developments in terms of the euro area crisis would help initiate the yen’s long-awaited downside reversal.
AUD – Next week (Tuesday, 7 February) the Reserve Bank of Australia will also meet. Consensus expectations are for a further interest rate cut (from 4.25% to 4.00%). The RBA opened the accommodative cycle in October (lowering the benchmark rate from 4.75% to 4.50%) and cut rates again at the December meeting (from 4.50% to 4.25%). The prospect of a slackening of monetary policy conditions in a context of stronger downside risks to growth, given the Australian economy’s strong exposure to the global cycle (not only the US but also China) is one of the main reasons that prompted us to revise downwards our projections for the Australian dollar from AUD/USD 0.96-1.01-0.97 to AUD/USD 0.96-0.95-0.94 respectively on a 3m-6m-12m horizon (see table). Expectations for a weakening of the AUD in the course of the year are also tied to its strong appreciation between 2010 and 2011, which in our view has pushed into overvaluation territory. The lack of a scenario pointing to a further uptrend in the prices ofcommodities this year – in particular those exported by Australia – is another factor on which we base our expectations for a weakening of the Australian dollar. The main risk to the central scenario for the AUD is a delay in the start of the correction – i.e. in the second half of the year rather than in the first.
CAD – By contrast, we have revised upwards the Canadian dollar’s profile, from USD/CAD 1.03- 1.00-0.98-0.96 to USD/CAD 1.01-0.98-0.96-0.94. The expected trend is still an appreciation. This is because contrary to the RBA, the Bank of Canada has not eased, nor does it intend to ease, monetary policy conditions, as indicated on occasion of the latest monetary policy meeting on 17 January (see WEM, 20 January 2012). It is also possible that the BoC start raising rates next year. This offers an advantage in terms of rate-yield differentials over the United States. In relative terms this is also true with regards to Australia, as Australian rates, while higher than the Canadian (official rate in Canada: 1.00%), are on the decline. Another advantage the CAD has over the AUD is its correlation to oil, which, among the various commodities, is the one still set to show the strongest upside tension, at least in the first half of this year. Lastly, coming to the direct comparison between CAD and USD, the Canadian economy’s strong dependence on the performance of the US economy means that a potential round of QE3 in the United States aimed at supporting US growth would indirectly support also the Canadian economy. The main risk to the central scenario for the CAD is a blander strengthening of the Canadian dollar than expected. The next BoC meeting is scheduled on Thursday, 8 March.
Appendix
Analyst Certification
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.
Important Disclosures
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).
Valuation Methodology
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
Newsletter
