Political events under the spotlight

Investors have few pointers to
trade off following yesterday’s Bank holiday in the States.
Nevertheless, it looks like a risk off play is settling ahead of
this weekend’s Italian elections, particularly in Europe. ECB
President Draghi’s speech to the EU parliament provided little
catalyst to markets as he didn’t elaborate on his post ECB press
conference in February. The most significant remark was that he
advised the G20 to employ “strong verbal discipline” on speaking
about currency movements. Despite the Italian election most risk
measures appear to be well behaved, Equity volatility has continued
to drop and gold prices have steadied after the recent sharp fall.
Under the spotlight today is a likely gain in the February German
ZEW survey.

FX markets are range bound but it
has been noteworthy that USD/JPY has struggled to maintain rallies
above the 94.00 level, with upward impetus in the currency pair
seeming to fade. Remarks by Japan’s Finance Minister Aso that the
administrations were not thinking of changing the central bank law
at present or buying foreign bonds helped to weaken USD/JPY.
 Though the G20 meeting successfully gave the all clear for
additional Yen declines, a lot is in the price in terms of policy
outlooks and any further JPY weakness is likely to be much more
measured.

The Aussie rose slightly over night
following the release of RBA policy minutes in February,
emphasising inflationary outlook for the economy would afford
options to ease policy further. Specifically, mining industries and
the labour market are the major worries for Australia, in which the
restricted growth in commodity prices would weigh heavily on the
economy. The minutes have limited effect on the AUD as the content
is largely in line with expectation.

Finally, Sterling hit a seven month
low on the Greenback yesterday following comments from Martin Weale
that the MPC wanted a weaker pound to boost export demand. He said
the Bank should hold off from counteracting any rise in inflation
that is caused by a weakening exchange rate. “To do any different
would be to veer towards deflation as a means of restoring
equilibrium”. The pound fell 0.5% during Monday’s session to reach
1.5438 its lowest level since July2012 and 5% lower than where is
started the year.