Euro: Plotting the LTRO Outcome and Market Impact

• Dollar Slips to a Two Week Low Before Heavy Risk Trend Swell
• Euro: Plotting the LTRO Outcome and Market Impact
• British Pound will Feel Definite Cross Winds from ECB Liquidity Pump
• Australian Dollar More Sensitive to Stimulus than Retail Sales Data
• Swiss Franc: Is the SNB Voicing a ‘Hold the Line’ Policy Rather than Depreciation?
• Japanese Yen: Carry Trade Unwinding and Exporter Earnings Repatriation
• Gold Tags a Fresh Three-Month High as Dollar Retreats, Stimulus Approaches

Dollar Slips to a Two Week Low Before Heavy Risk Trend Swell

Dollar traders were no doubt antsy heading into Wednesday’s trading session. The Dow Jones FXCM Dollar Index finally traded congestion for fresh two week lows as EURUSD and GBPUSD eyed three-month highs while AUDUSD overtook 1.0800 once again. Any normal trading day, such a move could be considered a tentative anti-dollar break; but this isn’t a normal time. Speculative interest is particularly thin and the volatility is painfully high heading into major, speculative-rousing event risk (more on that below). Trend requires confirmation.

Euro: Plotting the LTRO Outcome and Market Impact

We have finally come to the top event risk for the week: the European Central Bank’s second Long-Term Refinancing Operation (LTRO). For those unfamiliar, this is a call for all the region’s banks to tap an unlimited lending facility for three-year (and three-month) funds at a rate of one percent. Though policy officials would argue this isn’t an outright quantitative easing (QE) akin to what the Fed and BoE have pursued, it is absolutely in the same vein. The submission for bids was held open yesterday, but the event risk is in the announced allotment of funds. The trouble in the event is determining what would be considered a ‘good’ and ‘bad’ outcome for the event. In the central bank’s first round liquidity injection, banks borrowed an incredible €489 billion; and financial strain in the region seems to have eased further since the effort. Yet, much of capital that banks borrowed seems to have been reserved to fortify cash on hand rather than encourage growth. A large take this second go around (the consensus is roughly €400 to €500 billion) could therefore be interpreted as a sign that the conditions are perhaps more strained despite the collective stimulus than many had thought. Good or bad, bullish or bearish, the reality of the situation is that the euro has climbed significantly heading into the event. The market may have overreached in its expectations for how much this will accomplish.

British Pound will Feel Definite Cross Winds from ECB Liquidity Pump

Sterling traders had to turn a blind eye to the economic docket this past session and will have to do the same for its own releases over the coming trading day. Over the past session, both the February CBI sales report and GfK consumer sentiment survey marked off eight-month highs. In the upcoming session, we have mortgage approvals and consumer credit levels. Compared to the UK’s financial and economic connections to the Euro-area however, this data doesn’t even represent a blip on the radar. With a five day (one-week) correlation between GBPUSD and EURUSD of 0.98 (1.00 being perfect lockstep in direction and magnitude), the sterling’s immediate future is clearly held hostage by the market’s interpretation of the ECB’s stimulus program. Relief for the Eurozone financial system is relief for the UK’s own banking system.

Australian Dollar More Sensitive to Stimulus than Retail Sales Data

Another lackluster performance for underlying risk trends would offer the highest yielding major little traction to develop meaningful trend – bullish or bearish. However, the upcoming event risk could very well call an end to that lack of commitment. Through the morning Asian session hours, we have already pushed through a notable wave of data with little more that a shudder from the Aussie crosses. An in-line retail sales pick up (0.3 percent) and private sector credit report (0.2 percent) alongside a bigger-than-expected drop in 4Q construction activity (4.6 percent drop) does little to alter the currency’s yield bearing much less underlying risk trends. The Euro-zone’s forthcoming stimulus program can certainly provide though. With the currency stationed just off multi-month highs against safe haven counterparts, the pressure is high.

Swiss Franc: Is the SNB Voicing a ‘Hold the Line’ Policy Rather than Depreciation?

SNB interim President Thomas Jordan made reference to the troublesome franc in remarks following his speech on the economy. Yet, there were no material changes to his position over previous weeks and months. That said, it is worth assessing the central bankers commitment to keeping EURCHF above 1.20000. While Jordan continues to claim the currency is “excessively” and “massively” overvalued, does that necessarily mean that he will attempt to forcibly drive the currency lower; or is he merely preventing further appreciation? He specifically said in his commentary that the objective was to “prevent” further gains, and there has been no mention of further options to drive the currency down. Actions, ultimately, speak louder than words; and viable steps like lifting the floor, capital curbs and taxing capital inflow have been ignored.

Japanese Yen: Carry Trade Unwinding and Exporter Earnings Repatriation

USDJPY has tested eight month highs and we haven’t seen such a consistent (non-intervention) bullish move of this magnitude since 2009. In other words, this is an unusual state of affairs for those that trade the yen. For the regular speculator, the long-awaited advance likely encourages quick profit taking as the aggravation of an extended basing period is still too deeply engrained in the collective psyche. For the carry trade crowd, there isn’t much beyond the long-term outlook to encourage a strong take up. Alternatively, a market-wide carry unwind sparked by any risk aversion efforts would carry more weight amongst the yen crosses and therefore drag USDJPY under the right conditions. Another group that we don’t usually think about though are exporters. With the fiscal year end on March 31st, Japanese firms with international locations may be encouraged to repatriate earnings early if they don’t think there is much momentum behind the USDJPY upswing.

Gold Tags a Fresh Three-Month High as Dollar Retreats, Stimulus Approaches

There was a notable risk-appetite push through capital market assets this past trading day, but we know that isn’t a significant deterrent for the traditionally safe haven gold. The interest here is as an alternative to stimulus, inflation, the dollar and currencies in general. With the US dollar on the lam, investors had to search out an alternative safe place to park their capital with the knowledge that the ECB’s LTRO was dead ahead. While there is certainly an element of speculative appetite heading into the capital injection (as stimulus efforts are apt to encourage), there is perhaps an even larger market contingent that is looking to avoid the volatility altogether. Wholly escaping the warping influence of stimulus is difficult as there are few alternatives considered a store of wealth. In steps the market’s most renowned precious metal. Whether the stimulus program encourages or suppresses risk trends, gold would likely come out on top. The true alternative is the one where the dollar advances.

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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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