ECB’s Liquidity Drive

All eyes are fixed on the outcome of the second Long Term Refinancing Operation (LTRO) by the ECB due later today wherein market expects a take up of about €500 billion by the region’s banks. However, with the puzzle lying in determining the quantum of allotment which can be termed as “good” or “bad”, market believes that more the liquidity the better it is for the Euro. Across the Atlantic today, markets keenly await GDP data and Bernanke’s testimony. At home, following unchanged consumer confidence data released earlier today, data just released indicates that mortgage approvals and consumer credit rose for January.

Pound Sterling – UK Markets

The Pound has strengthened against both the Euro and the US Dollar buoyed by yesterday’s better-than-expected CBI reported sales data for February. Additionally, concerns over additional easing tapered off after the BoE Deputy Governor, Paul Tucker, indicated that policymakers must be prepared to “gradually” withdraw stimulus as the UK economy strengthens. MPC member, Ben Broadbent also expects consumption in the UK to pick-up strongly in the second half of this year. Data just released indicates that mortgage approvals and consumer credit in the UK climbed for January. However, data released earlier today indicated that consumer confidence index in the UK was unchanged for February. Markets were expecting the index to improve following the recent recovery in British retail sales and easing inflation. We believe that Sterling will likely take further cues from the outcome of the ECB’s second LTRO due later today.

US Dollar – US Markets

Market optimism surrounding the ECB’s second round of liquidity operation has dampened appeal of the US Dollar as a safe haven asset. Turning towards the domestic landscape, Cleveland Fed President, Sandra Pianalto backed Bernanke’s dovish stance indicating that the monetary policy is “appropriately positioned” in the face of a “frustratingly slow” economic recovery and modest inflation. However, yesterday’s economic data painted a mixed picture, with a decline in durable goods orders and a sharp improvement in consumer confidence. Markets are keeping a tap on the slew of economic releases due later today including Gross Domestic Product, Core Personal Consumption Expenditure and Chicago Purchasing Managers’ Index. Investors are also keenly awaiting the release of the Fed Beige book survey and the Fed Chairman, Ben Bernanke’s semi-annual testimony to gauge the possibility of another round of quantitative easing in the near future.

Euro – European Markets

The Euro is trading higher against the US Dollar on expectation that banks will tap the ECB's three-year cheap loans offering in large numbers, with a take up of above €500 million likely to be cheered by markets. This optimism comes on the back of a successful LTRO in December which was instrumental in boosting liquidity in the strained financial system. Highlighting a brighter scenario, ECB’s Ewald Nowotny indicated that the region may soon witness 'green shoots' of economic revival. Additionally, reports indicated that the Dutch Parliament would vote in favour of the second Greek rescue package. However, gains were subdued following yesterday’s report that Ireland will hold a referendum on ratifying the EU fiscal compact. On the economic front, market awaits Eurozone’s consumer price inflation report scheduled for release later today.

Other Currencies – Highlights

The Australian Dollar has strengthened against the US Dollar this morning following a rebound in Australian retail sales. Data indicated that on a seasonally adjusted monthly basis, retail sales in Australia rose 0.3 percent for January, compared to a 0.1 percent decline posted for December. Additionally, market optimism over ECB’s move to bolster liquidity in the region’s banking system has fuelled risk appetite and aided trading sentiment towards the Aussie Dollar. However, the housing sector in Australia remains a cause of concern after data indicated that new homes plunged 7.3% for January, the biggest monthly fall since records began in October 2000.