An election in Italy, political wrangling in the US and mounting tension over BoJ nominations is keeping investors on their toes. The outcome of each event has the ability to significantly impact price action. Consequently, EUR is looking very nervous ahead of tonight’s final day of voting in Italy, while JPY looks to be banking on a very dovish nominee for BoJ Governor from PM Abe. Commodity currencies didn’t escape unharmed, with AUD and NZD falling after a fall in manufacturing sentiment in China. Equity markets in Asia managed to hold fairly steady on the back of limited new information about the sequestration negotiations in the US, with the exception of the Nikkei 225 which is benefiting from reports that Kuroda is leading the race for the top job at the BoJ.
News agencies in Japan reported over the weekend that Abe is planning on nominating Kuroda for the position of BoJ governor. The nomination would make sense given Kuroda’s affinity with aggressive easing and his stance against foreign bond purchases. Abe’s finance minister, Aso, has been very vocal about the idea of leaving risky foreign bond purchases off the table. Whereas, Iwata, a former BoJ deputy governor and one of the three frontrunners for the BoJ nomination, is pro-foreign bond purchases. Former Minister of Finance official and BoJ deputy governor Muto, the last frontrunner, isn’t as dovish as the other two. Hence, given Abe’s push for aggressive monetary easing and his need to gain support for any nomination he puts forward, Kuroda seems the logical choice.
What does the market make of Kuroda?
Kuroda is currently the head of the Asian Development Bank, a post he would have to relinquish before taking the top job at the BoJ. He is an advocate of lose monetary policy, which explains today’s push away from the yen. If Kuroda does take office we expect him to be very dovish from the outset, possibly leading to more yen weakness.
Manufacturing PMI in China takes a surprisingly big hit in February
HSBC’s Flash Manufacturing PMI Index fell to 50.4 from 52.3 in the prior month, much more than the expected 52.2. The figures are causing some investors to doubt previous assumptions of a strong rebound in Chinese growth this year. Today’s data doesn’t spell the end of the recovery in China, far from it in fact, but it does cast more doubt over previously contested figures from Beijing. A few people will be asking how China can record massive surges in exports and other official data when sentiment in the heart of its economy is weakening. However, we are going to wait for next week’s export data and official manufacturing PMI data to get a better idea of where the economy is heading.
Tonight, all eyes will be on parliamentary elections in Italy. The most recent polls suggest the centre-left collation led by the Democratic Party is going to narrowly win. Berlusconi’s centre-right is running second. The likelihood of either party gaining a majority in the senate seems unlikely at this point. Thus, we think the centre-left would have to form a coalition with Monti’s centrist alliance.