- Prime Minister Abe nominates Kuroda as new BoJ governor
- Less fear of a political deadlock in Italy as investors do not shun Italian debt
- More strong housing data out of the U.S.
This morning Japanese Prime Minster Shinzo Abe confirmed that he is nominating Haruhiko Kuroda, president of the Asian Development Bank, to become the next BoJ governor. Mr Abe also named Kikuo Iwata and Hiroshi Nakaso as deputy governors. Even though the nomination of Kuroda has been widely anticipated in the media over the past couple of days – reflected by a muted market reaction – his appointment along with the two deputy governors (the new deputy governor Iwata has been even more vocal than Kuroda) that BoJ will now become even more aggressive in reaching the new 2% inflation target. We believe today’s nominations reflect a formal shift in Japanese monetary policy and that purchases of government bonds will be ramped up by BoJ and we do not believe that everything ‘is priced in’. Hence, our 2013 targets for U.S.D/JPY and EUR/JPY are still 100 and 134, respectively. See our FX Forecasts here.
Global risk sentiment has improved strongly over the past 24 hours. The strong U.S. numbers on Tuesday confirmed that the underlying recovery in the U.S. has gained momentum and yesterday investors showed that they haven’t completely lost their confidence in Italy. The long-awaited bond auction went relatively well with a higher-than-normal bid-to-cover rate and peripheral bonds regained some of the losses seen on Tuesday. A Bersani-Berlusconi government now seems more and more likely. A minority government either run by Bersani or Berlusconi supported by Grillo looks distant not least after Grillo on Twitter announced that his government would not give a minority government a vote of confidence. In Research: Italian election -- what’s next we take a close look at the likely scenarios in Italy. We indeed argue that a Bersani-Berlusconi government seems to be the most realistic option at the moment. It might be short-lived and it would mean a reform pause. But from a market perspective that would not necessarily be a disaster, as we believe that investors will remain confident that the ECB’s OMT programme is well in place.
The relative calm in the European bond market, more strong data from the U.S. housing market (pending home sales up 4.5% in January) and Bernanke once again underlining that he is in no hurry to exit the QE programme was a cocktail appreciated by the U.S. equity market that overall ended the day more than 1% higher. The positive sentiment has been carried over to Asia with Nikkei up more than 2.3% boosted by the Kuroda nomination. The euro has also regained strength overnight and EUR/U.S.D is now trading above 1.3150. We still see more upside for EUR/U.S.D this year.
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