LTRO 2.0 Looms
The euro advanced further during the Asia session ahead of today’s 3y LTRO. Our bank analysts and economists expect liquidity demand to reach EUR492 bn. Having fallen steadily in recent weeks, the consensus appears to sit in the same vicinity. There is less agreement about how the euro will react to any surprise however. Our sense is that a larger number is likely to provide a very short-term boost to the euro, but that this will eventually subside once the scale of ensuing ECB balance sheet expansion is appreciated. A lower number would raise the risk of an immediate euro selloff. Irish Prime Minister Kenny called a referendum on the EU fiscal compact. No date has been set, however a May or June poll seems likely. Recent opinion polls suggest the electorate is divided on the issue, so safe passage is by no means guaranteed. If Ireland were to deliver a ‘no’ vote, it would not necessarily torpedo the fiscal compact idea (since only 12 of 17 Eurozone members need to approve it) but it could prevent Ireland drawing funds from the ESM after the facility becomes operational in July. There is also a chance that Ireland could lobby for concessions in a bid to persuade the electorate to back the referendum, and any attempt to adjust the terms of the EU/IMF program could unnerve investors. ISDA made a second announcement on the subject of Greek CDS. Two days ago it received a question relating to a potential credit event in Greece and overnight, it decided to accept that question for further consideration. The committee is due to meet on Thursday at 1100 GMT to decide whether a credit event has occurred. Even if the committee rules that a credit event has not happened yet, the possible invocation of CAC clauses in a few weeks could lead to a credit event being declared at a later date. Several Bank of England policymakers are due to appear before a parliamentary committee and Chairman Bernanke begins the first of two days of Congressional testimony today. Overnight, EURUSD traded 1.3443-1.3486 and USDJPY 80.26-80.69.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank