LTRO2 results brings March Madness

Overnights insignificant price action was to be somewhat expected ahead of the ECB’s LTRO2 announcement within the hour. Median expectations are around +€470b, a number at the upper end of the range buoyed by yesterday’s strong take-up in the ECB’s 1-day bridge facility. Anything below a sub-+€200b uptake will hurt risk sentiment, while a result above +€500b would likely support a stronger risk rally and reinforce recent gains in risk sensitive currencies.

With a threat of a large allocation uptake, the single currency potentially has more to lose. Eventually, this excess liquidity is likely to depress Euro front-end rates further. It is this that should keep the EUR vulnerable outright and against the crosses. If there is such a large uptake, naturally the market will be questioning why Euro-banks are so enthusiastic for funding. It seems to be a rotating exit door when it comes to reasons for shortening the EUR.

Position summaries indicate that the market is heavily underweighted the EUR, outright and on the crosses. The past five days prices action certainly has tested the metal of many traders. Options, month-end requirements, stronger global data is trying to turn even the most pessimistic of hearts. This can be expected as a temporary measure for sure as we enter March madness, where again the Euro-zone will face its regular diatribe of knockers. Let’s see what the results bring us for our next move.

Results:

Banks tapped the ECB for +€529.53b in the LRTO second offer. This higher figure will boost hopes that they will use some of these funds to buy up some Euro sovereign debt. A contrarian will tell you that this higher than expected demand may also signal that banks expect funding stress to continue. Now we have to wait and see if investors are willing to apply further risk or have they been put off by the number of bidders for funds increasing from +523 to +800 over the two operation? Initial reaction has that well publicized option 1.35 level remaining intact!

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