Forex Blog

This week’s ECB LTRO program is supportive of emerging and higher yielding G10 currencies. This second 3-year LTRO provided a total of nearly +€530b in fixed rate funding, slightly above the consensus median expectation of +€450b. This excess liquidity in the system is depressing front-end yields and making it easier to fund carry trades and risk positions. As long as risk appetite remains generally healthy, the additional liquidity should contribute to renewed EUR underperformance. The markets are dealing with yield, risk and carry for now; eventually we will return to question of reserve requirements where the increase in reserve accumulation and then diversification out of ‘big’ dollar should be supportive for the EUR. When investors eventually buy into Europe finally dealing with the sovereign and banking sector stress is when the EUR finds its reserve bid.

Below are some other highlights of the week:

EUROPE

• Dollar opened the week stronger and has continued that trend, very much in line with Asian equities, while Euro hot sellers managed to beat the single currency away from the psychological 1.35 handle.
• EU: Very much in toe with recent rhetoric, the G20 meeting failed to increase IMF funding for Europe. Finance ministers stated that European authorities would need to strengthen the EFSF/ESM firewall before the members could commit to expanding funding for the IMF for use in Europe.
• GRE: Greece provided full details about the PSI exchange terms last weekend, and they remain broadly in line with market expectations.
• GER: The German lower chamber voted on the disbursement of funds for Greece’s second round of financing late European Monday. The Bundestag passed it by a large majority (+496 vs. -90 and five abstains), allowing risk again to be applied.
• EU: Euro-zone M3 rebounded strongly in January, with a +0.7%, m/m gain, following the +0.5% the previous month. Credit to the private sector rose +0.5% m/m, largely driven by lending to the household sector, while lending to firms was flat on the month following sharp falls in November and December. This would suggest that the primary LTRO program succeeded in averting a disorderly de-leveraging in the Euro banking sector.
• EU: The Irish Taoiseach said that the government will hold a national referendum on EU Fiscal compact after receiving legal advice from the state’s attorney general. He is confident that the Irish people will endorse it emphatically. The compact, agreed at a special EU summit last month, proposes tough new budgetary discipline on each EZ state. Twenty-five of the European Union’s 27 countries have signed up to the new treaty, with only Britain and the Czech Republic opposed.
• EU: S&P’s put Greece in selective default, as widely expected into any debt restructuring. The rating agency stated it is likely to raise Greece’s ratings back to CCC after the debt swap. The ECB temporarily suspended Greek debt’s eligibility for collateral until the swap is completed. In the meanwhile Greek banks will be able to access the ELA facility for liquidity.
• EU: Euro-zone economic confidence improved slightly to 94.4 this month from 93.4 in January. Industrial confidence edged up a tad, while services confidence remained flat.
• SEK: Swedish retail sales and trade balance surprised better than expected in January. Retail sales grew +0.1%, m/m. On a seasonally adjusted basis, trade surplus amounted to +SEK7.6b last month compared to +SEK7.1b in December.
• ITL: The prospect of more cheap ECB liquidity has helped the Italian Treasury to sell ‘the top planned amount of bonds’ this week. Italy issued +€6.25b in 2017 and 2022 bonds. The auctions have allowed Italian 10-year borrowing costs to fall to their lowest level since August. The auction yield fell to +5.50% from +6.08% a month ago. Demand for the 10-year tranche (+€3.75b) totaled 1.4 times, very much in line with last month’s much smaller issue.
• EU: ECB has provided another substantial liquidity injection to the financial system. The second 3-year LTRO provided a total of nearly +€530b in fixed rate funding, slightly above the consensus median expectation of +€450b. According to analysts “the boost to the Euro-system’s balance sheet of +€313b is more substantial than after the first distribution. Together with the net liquidity injection of +€193b, the balance sheet has been boosted by more half-a-trillion EUR in two months, an increase of more than +20%”.
• ECB: Indicated that +800 banks had bid for funds, well above the +523 that bid in December, suggesting that banks see less stigma in using the facility. It’s not the stigma, but where will they invest that money? Will it be in Europe or US?
• EU: Inflation at+ 2.6%, y/y, surprised a touch weaker than consensus for +2.7%, y/y and this was despite the rise in oil prices! Core inflation has moderated to +1.5%, y/y, from +1.6%. Lower inflation should leave scope for the ECB to remain dovish and possibly support the economy with further rate-cuts.
• CHF: Swiss KOF leading indicator stabilized at -0.12 in February, from an upwardly revised -0.15 in January. This uptick is largely due to improving Swiss consumer confidence.
• SEK: Swedish GDP contracted -1.1%, q/q, in Q4 while growth in Q3 was revised sharply lower to +0.9%, q/q, from +1.6%. The drop was fueled by exports, falling -3.9%.
• NOK: Norges Bank announced it will buy +NOK350m equivalent of foreign exchange per day for the Government Pension Fund in March and well within the boundaries of normality.
• UK: Foreigners resumed buying gilts in January, buying +£9.4b worth following -£10.6b of sales in December. Analysts note ‘less risk of further QE should support official flows into the UK, especially if EZ risk remains high’.
• EU: EZ manufacturing PMI was unrevised at 49.0 this month, up from 48.8 in January. Breaking it down, Germany was revised a tad higher to 50.2 while the French was revised lower to 50.0. PMIs improved in Italy and Ireland and stayed flat in Spain. The Greek PMI on the other hand contracted sharply to 37.7 from 41 (lowest reading in history). This would suggest that sustained readings above 50 confirm “the better growth outlook since the start of the year”.
• GPB: UK’s manufacturing PMI fell to 51.2 from 52.0, below consensus for a flat read. A reading well above 50, suggests further extension in QE is now less likely.
• SEK: Swedish PMI disappointed low at 50.3, giving up a large part of the sharp pickup in January. In contrast, Norway’s PMI extended gains and it is now the highest in the G10. However, Norges Bank remains dovish.
• CHF: Swiss GDP grew +0.1%, q/q, in Q4, stronger than consensus of -0.1%. On an annual basis the GDP rose +1.3% in Q4, and for the year real GDP increased by +1.9%.
• GBP: UK construction PMI rose to 54.3 from 51.4, again another positive sign for the economy which should support the view that any further extension to QE is now less likely. Less risk of debt monetization should support flows into the UK.
• NOK: Norway’s retail sales surprised very strong at +6.7%, y/y, in January, up from +2.6%. However, the market remains weary of a dovish surprise from the Norges Bank.