Market Drivers February 25, 2013

Rumor of Kuroda nomination creates gap opening in USD/JPY but rally runs out of gas
Euro rallies towards 1.3300 as speculation that Italian election will not end in stalemate
Nikkei 2.43% Europe 1.65%
Oil $93.94/bbl
Gold $1592/oz.


Europe and Asia:

CNY HSBC PMI 50.4 vs. 52.2
GBP BBA Loans for House Purchase 32.3K vs. 34.2K

North America:
USD Chicago Fed Manufacturing Activity 10:30

The EUR/USD rose steadily towards the 1.3300 figure as the European morning trade progressed on speculation that the Italian election will not result in a stalemate that could endanger the European Monetary Union. Italian voters have gone to the polls to cast votes in a three way race between the establishment candidate Peir Luigi Bersani, Silvio Berlusconi and the protest candidate Beppe Grillo.

Initial reports suggested that Mr. Grillo who is viewed as a true wildcard in the race may garner as much as 30% of the vote, but leaked exit polls indicated that Mr. Grillo was pulling an expected 20% and therefore would not be able to act as a spoiler in the election. Voting turnout was also hampered bad weather conditions which suggest that some of the protest vote against the austerity measures undertaken by the caretaker government of Mario Monti may not have materialized.

Polls will officially close at 1400 GMT after two days of voting and first exit polls will be officially released by then. If Mr. Bersani appears to be able to form a working coalition, then currency markets will likely breath a sigh of relief and push the EUR/USD through the 1.3300 level on the assumption that Italy will stick with the austerity program. It remains to be seen however, if Mr, Bersani will have the political power to maintain Mr. Monti's policies and currency traders will no doubt be watching the Italian sovereign debt markets for any signs of investor concern.

After elections are settled, both the strength of the EUR/USD and Mr, Bernsani's political fortunes will likely be driven by the economic conditions in the EZ rather than any further policy choices. If currency markets do not see some improvement in the economic data in the region, the rally in the EUR/USD is likely to be short lived.

Meanwhile USD/JPY gapped open to a high of 94.65 at the start of Asian trade on the speculation that Prime Minister Abe will nominate the ultra dovish Haruhiko Kuroda to the post of BOJ Governor, but the rally quickly fizzled with the pair dropping below the 94.00 level as there was no official confirmation from the government and traders took quick profits on the run up.

Mr. Kuroda is currently the head of the Asian Development Bank and is viewed as a very experienced policymaker and was Japan's "top currency diplomat" in the 1990's. He speaks fluent English and is considered to be on par with the world's top monetary officials. If nominated it is likely he will be approved with ease by the Japanese parliament. The opposition party today noted that it would "be hard to oppose the nomination."

Mr. Kuroda's appointment would no doubt turn the BOJ policy to a much more accommodative stance, but much depends on the exact measures that he will take as the Governor of the central bank. If Mr. Kuroda signals that the BOJ's QE program will be expanded immediately instead of 2014 as announced earlier and if he shows a willingness to engage in unorthodox measures such as purchasing of foreign sovereign debt, the rally in USD/JPY will likely continue with force and push the pair through the 95.00 level and perhaps even towards 100.00 as the market continues to sell the unit.

However for now, the pair has clearly run into some profit taking which was exacerbated by news that HSBC flash PMI reading dropped to 50.4 from 52.2 eyed. This was the first month over month decline since August of 2012 and the index perilously close to the 50 boom/bust level. Some analysts have argued that the decline may have been caused by the seasonal skew due to the Lunar New Year holidays, but Nomura economist Zhang noted that over the past seven years such seasonal adjustments were only responsible for .95 of the dip indicating that today's data signals a deeper slowdown in growth.

If these concerns about global growth are taken more seriously as the North American session comes on board then USD/JPY could be in for more selling with the pair possibly dropping to 93.40 to fill the weekend gap caused the by Kuroda nomination rumor.