Bernanke Ruffles Feathers
Surprisingly it was the Fed that spoiled the post-LTRO party during US hours as Fed Chairman’s Semi-Annual testimony before Congress suggested further stimulus might just be harder to come by. He did not state that there may be a revision in their policy targets, but acknowledged that the unemployment rate was falling faster than expected, which would obviate the need for stimulus. Although he dismissed inflation fears as temporary, this is clearly weighing somewhat on policy and the EUR reacted, falling to 1.3334 from an intra-day high of 1.3487. Some degree of post-LTRO profit taking may have contributed, but the better tone of US data of late was bound to play a role. Chicago PMI today was also firm at 64.0 and the GDP released was better than expected. The ECB announced that is lending banks EUR 530 bn in the much anticipated 3-year LTRO. This was slightly above consensus estimates and above the December offering both in terms of the gross number and the number of banks participating (800 this time around). The initial reaction was of Euro-Risk cross selling. EURUSD fell marginally but the main moves lower came through the likes of EURAUD, EURCAD and EURNZD. The clear dynamic here is a stable risk environment, with some of the tail risks removed, but also an increasingly expansionary monetary base. Therefore the reaction in the euro-risk crosses is understandable and we see scope for a further move lower over the medium term. Our European bank analysts expect the Spanish banks to be the biggest takers. They note that the private sector has largely switched off funding for most domestic players and the sector isn’t being reformed. This is “chronic” central bank funding. For now, the potential longer term problems behind the LTRO are likely to be overlooked, especially in a context of a better macro environment more generally. Elsewhere Swedish GDP numbers were weak, but SEK was later dragged higher in line with other risk assets. Fed Chairman Bernanke begins the first of two days of Congressional testimony today. Overnight, EURUSD traded 1.3316-1.3486 and USDJPY 80.26-81.31. Ahead on Thursday a raft of PMI numbers are due globally – starting with China and ending with manufacturing ISM in the US. With the exception of Eurozone aggregate manufacturing PMI, all key prints are expected to be above 50.
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