Headlines • ECB allots €489 billion in three-year LTRO loans to 523 banks
• Italian Q3 GDP contracts 0.2% in line with expectations; annual rate now just 0.2%
• BoJ expects GDP growth estimates of 0.1% contraction for 2011/2012, having forecast 0.5% growth
• Bank of England’s MPC votes 9-0 to keep rates on hold at 0.5% and asset purchases unchanged at £275bn
• BoE minutes: More QE could be warranted in due course, if inflation undershoots expectations and the eurozone situation deteriorates
• UK’s AAA rating threatened by eurozone crisis, says Moody’s
Market reaction
Traders said market was putting on “disappointment” trade, after Italian and Spanish bond yields were higher despite the LTRO being successful. They added that much of this had been priced in beforehand. Target support is now seen at $1.2950.
Traders say the euro has potential to fall quite quickly at current levels, with thin holiday liquidity accentuating the bearish mood. AUD was particularly vulnerable after its rally to $1.020, losing 50 cents down to $1.0150.
Flows
Mixed flows in thin liquidity saw EURUSD gain 80 pips in the build-up to strong demand for the ECB’s long-term refinancing operations before rapidly reversing the largely overdone gains after the central bank’s announcement.
EURUSD reached as high as $1.3197 but subsequently plummeted, losing over a cent as profit-taking sell orders, and reports of re-established shorts from leveraged accounts, saw EURUSD fall to$1.3075. Traders say thin market and reversal of momentum could see EURUSD return to its sub $1.30 levels from last week.
GBPUSD was up more than 90 pips, reaching as high as $1.5770 due to a generally weaker dollar as well as strong buying seen from a UK clearer, and strong demand from Asian and Middle Eastern names. Cable moved lower from 1.5572 highs after hitting large offers at $1.5780 and subsequently sank below $1.57 as dollar buying regained momentum.
The Australian dollar extended gains against the dollar and reached record highs against the euro as risk appetite picked up. Stronger equity markets fuelled AUDUSD buying through $1.02, though fast-money selling quickly reversed the move higher sending the Aussie back down to $1.0130.
Flows in CHF were receding, with short-term range trading between SFr1.2170 and SFr1.22. Dealers say order books are now biased to the sell side in EURCHF, with offers from SFr1.2270 to SFr1.23.
Options
EURUSD vols slightly higher in the European trading session, with one-month ATM trading at 12.7 and three-month at 14.25, both about .1 higher than yesterday. Traders reported muted activity on Wednesday morning. EURUSD vols have found a base after being sold off for the past week but very little flow is going through.
Swaps
The cross currency basis swap moved slightly wider to -119, up from -115 on Tuesday.
What to look for
In choppy market conditions, investors might benefit from relative value trades as opposed to directional bets in the majors. Go long NOKSEK, recommends Bob Sinche, chief currency strategist at RBS.
An unexpected 50 basis points cut from Norges Bank and just a 25bp cut from the Riksbank have weighed on this trade in the past week, but it might present an opportunity to benefit from future upside, says Sinche. Norway should be more insulated than Sweden, as relative growth is expected to be more resilient next year and rate spreads are likely to offer support to NOKSEK in the months ahead.
The Norges Bank do not meet again until March, and appeared to be exercising caution and perhaps also anticipating further ECB rate cuts. In contrast, the Riksbank, which tends to be reactive as opposed to pre-emptive, looks to have assigned some weight to the recent strong Swedish Q3 GDP release, despite the deterioration in more recent survey data.
The Riksbank could well be forced to revise expectations as the Swedish economy is hurt by the deterioration in euro-area activity, and cut rates further.
Spot, 7am EST
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