Ireland To Hold Referendum
The euro came under pressure in the US session after Irish Prime Minister Kenny announced that there will be a referendum on the EU fiscal compact. It’s hard to extract the longer term implications of this move at this stage and in reality, it largely depends on the question asked (just like for the Greek vote last year). However, despite support from the primary two parties, recent polls suggest that the electorate are more split so the treaties passing cannot be taken as given. If Ireland were to give a ‘no’ vote, it would not necessarily stop the fiscal compact adoption (since only 12 of 17 Eurozone members need approve) but it would stop Ireland drawing funds from ESM, according to the ESM treaty. There is also a chance that Ireland could lobby for some compromises if it tells the EU that the chance of rejection is high –at the very least adding more event risk into the euro equation. Risk appetite otherwise remained firm on Tuesday, US data was mixed with weak durable goods numbers (down 4.0%m/m) but a strong consumer confidence print (70.8 vs 63.0 cons). Our US economists note that the improvement was led by the expectations component (88.0 after 76.7). Focus today will inevitably switch to the ECB’s second LTRO. Expectations for a large take-up have kept risk assets in demand and after months of speculation consensus estimates have probably risen to around similar levels of the last offering (EUR 489bn), if not higher. On the UBS side, our bank analysts have published their expectations of €492bn some three weeks ago. Aside from the LTRO there is a busy data schedule ahead with tier-one macro releases and policymaker speeches due across much of Europe Fed Chairman Bernanke may need to tackle some tough questions over the Fed’s policy changes when he testifies before Congress in the US session. EURUSD traded 1.3385-1.3463 and USDJPY 80.01-80.79 overnight.
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