Countdown to the ECB’s second LTRO (Long-term refinancing operation) ends today as we will find out how much the banks have borrowed at 10.15. Estimates vary wildly with figures generally ranging from €200bn - €1tn, with one bank suggesting the figure could be as much as €3tn. When the first LTRO was released in December banks borrowed €489bn and we think the figure is likely to be similar again at around €500bn. The question has to be asked, who will benefit from these cheap loans? The idea is that this cheap money is filtered down through the banking system into the economy via loans to small and medium sized businesses and to the general public. I think we all know that in reality this will not happen and banks will use the funds to top up their balance sheets for their investment banking operations. All the ECB are doing is buying time for banks to speculate their way out of trouble. This may work for the bigger banks until they get themselves back on their feet but for the smaller institutions they will need continued support if they are not going to collapse and this may lead to LTRO 3 later on in the year. It is hard to factor how the LTRO 2 will affect the currency market as a low figure would mean that the markets would lack liquidity going forward as this available money has not been taken up and a high number would show that the European banks are weak as they need cheap loans to keep them going. We would expect the Euro to come off once the figure is announced so expect GBP/EUR to go up and EUR/USD to go down.
Other then the LTRO there is plenty of data out today. German unemployment figures released this morning were slightly worse then expected at 6.8% but this rate is still very low and is the same as January’s figure. At 9.30 the UK released consumer credit and Money Supply figures which were both better then expected at £1.8bn and 1.6% respectively vs consensus figures of £0.2bn and -0.8%. This may show that the need for QE in the UK is not as great as first anticipated as the consumer credit certainly looks healthy for the time being. We have CPI figure out of the Eurozone at 10.00 which are expected to be 2.7% for the year. Any figure below this would be bad news for the Euro so watch Euro crosses at this time for volatility.
Later on in the day there is the GDP figure out of the US at 13.30 with expectation for the figure to be better then last quarter. The US will be anticipating a rise in GDP which will show that they are on the road to recovery and will back up the good data we have seen over the last few months. We should see the Dollar move around this figure and if the figure meets expectation we should see it strengthen. If you buy Dollars it may be worth taking advantage of the European news early in the day before the US data is released. Finally later on today at 19.00 the US Fed will release their beige book which is their outlook on the economy and coupled with the release of GDP earlier in the day it will be interesting to see how their view the road ahead. Their outlook will likely set the tone for tomorrows trading, they have tended to be cautious and I do not see that changing so USD may weaken at the start of trading tomorrow.
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