Anticipation of pending eurozone events and UK data served to underpin the euro and weigh on sterling Thursday. Friday, the euro will be driven by the European Central Bank’s announcement (6:00 a.m. ET) of the amount that banks plan to repay of the three-year LTROs purchased in late 2011 and early 2012, as well as by comments from ECB President Mario Draghi, who will give a special address (“Lessons form the Past; Challenges for Years to Come”) at the World Economic Forum in Davos, Switzerland. Of the ECB’s two three-year LTROs done in December 2011 and February 2012, E489 billion matures January 30 and E529 billion matures February 28. Banks must notify the ECB on a weekly basis about the amount to be repaid. The market feared that early repayment might push up short-term European rates, and notes that “the implied interest rate of the March Euribor futures contract did increase by about 15 basis points at the start of the year, but has since stabilized, following some calming words by an ECB official,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in a research note. He observed that the daily closing implied yield has been between 26-28 basis points for more than a week. Global Investors are flocking back to the euro, with central banks (talk of Mid east demand lately), real money (buying Spanish and Italian bonds) and equity fund demand being mentioned, Chandler said. In the euro, a break of $1.3400 (January 14 high at $1.3404) “could quickly see $1.3500 the high from last year ($1.3485 high seen in late February),” Chandler said. CitiFX looked for repayments to be somewhere between E50 billion and E100 billion, with market expectations centered around E100 billion Banks do not necessarily have to report to the ECB this week that they plan to repay (can do so on a weekly basis), but the thinking is that there there is currently “social pressure to show up on the list to pay it down,” said CitiFX. What banks do will be important for fixed income and FX, because basically they are “walking away from a positive carry trade,” and would only do so if they believed that a sea-change was at hand, said CitiFX. LTRO repayments of less than E100 billion “could dampen the latest pickup in the eurozone short-term rates and add conviction to the view that the ECB balance sheet would shrink only gradually over time,” said CitiFX. Conversely, larger LTRO repayment would suggest scope for higher eurozone short-term yields, which would likely “support EUR, especially against low yielding currencies like USD, JPY and to a degree GBP,” said CitiFX.
The euro was trading at $1.3380 heading into the close, on the high side of the day’s $1.3286 to $1.3392 range. Larger selling is expected around the 2013 highs near $1.3400/05. The pair was underpinned on the day by a variety of factors, from anticipation ahead of Friday’s ECB LTRO announcement which is underpinning Bund yields to a degree, to another solid rise in U.S. stocks (Dow Industrials close up xx points,, S&P 500 trades over 1500 for first time since December 2007, Nasdaq off only 20 points despite the Apple stock tumble). Despite talk of central bank and even real money demand, there has been little comformation that global investors are yet jumping into euros. “That the EUR is attracting little attention from institutional investors (as revealed by BNY Mellon iFlow data) is perhaps the first point to note in this respect,” said Neil Mellor, currency strategist at Bank of New York Mellon. Mellor reminded that “a trending asset or currency requires volume to sustain its momentum is a central tenet of Charles Dow’s famous theories on pricing behaviour; and just possibly it is the sense that improved sentiment has sprung, not from conventional sources of success, but from last gasp endeavours to avert financial disaster that is tempering the market’s enthusiasm.” BONY Mellon maintained that “the EUR’s rally may be living on borrowed time.”
Friday’s release of the German IFO’s January business survey (median at 103.1 versus 102.4 in December) will be key for short-term euro direction, along with the ECB’s LTRO announcement and ECB President Draghi’s comments, traders said. If the euro was buoyant near 2013 highs, the same could not be said of cable, which was floundering at sub $1.5800 levels last seen in late August. All eyes Friday will be on NatStats release of preliminary Q4 GDP in the UK, with sterling weighed partly on anticipation of a soft number. Carl Weinberg, chief economist at High Frequency Economics, in Valhalla, NY, said their model “points to a contraction of the economy last quarter at a 2.7% annualized rate, leaving GDP 0.3% lower than a year ago.” He reminded that Q3 GDP was bloated by the Olympics and “jumped at a 4% annualized rate to end up 0.1% over year ago levels.” The Median forecast for quarter-on-quarter Q4 GDP is -0.1%, compared to the +0.9% quarter-on-quarter seen in Q3, and for a +0.2% reading for year-on-year. Cable was trading at $1.5792, in the middle of the day’s $1.5753 to $1.5852 range. Even if Q4 GDP pleases, market bias will be to sell any rallies toward the 200-day moving average, in place currently at $1.5907, traders said. Dollar-yen proceeded to march higher Thursday, bolstered by remarks from Japan’s Deputy Economy Minister Yasotoshi Nishimura, who said dollar-yen at Y100 would not be a problem for the economy. “That Y100 comment got me back in,” said one U.S. trader. Dollar-yen was closing at Y90.40, on the high side of the day’s range of Y88.42 to Y90.56. The clear-cut break above Y90.25, which was also the January 21 peak, focused attention on the June 23, 2010 highs near Y90.59, which is where the pair stalled earlier. The solid close, easily above the psychological Y90 mark, has players thinking the pair is set to move even higher, towards other June 2010 peaks ranging from Y91.10 to Y92.89.
EasyForexNews Research Team