EUR USD (1.3445) On the eve of LTRO2, the ECB’s president has reasons to feel some satisfaction. Data published by the Bank on Monday confirms that Italian and Spanish banks increased their respective domestic sovereign bond portfolios by impressive amounts. The yield on the short-term debt of these countries is markedly lower than in late 2011, and the new auctions yesterday also saw strong demand. These developments may show that investors have the confidence to delve into peripheral sovereign paper, and that the return on the LTRO carry-trade remains attractive. The ECB data also showed that broad money in the euro area grew by 0.7 percent in January, which is a step in the desired direction. This gain is very modest, though, and the three-month average is still well below ECB’s 4.5 percent reference value. It was nevertheless accompanied by some improvement in the business credit data – in December the net new credit to business plunged by €35.6 billion but it declined by only a billion in January. Mr Draghi conceded that it is ‘hard to say’ whether LRTO1 made its way into the real economy. His reluctance to be upbeat may have been due to February’s plunge in Italian business confidence. However, if sovereign yields continue to fall, banks are more likely to seek higher yields lending to the private sector. We continue to see the potential for it to climb to 1.3395. Support is at 1.3285.
Click here to read the full report: Daily forex 02.28.12
Deutsche Bank