Shared currency falls prey to 'sell-the-fact’ trade
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The euro declined Wednesday after European banks grabbed a somewhat larger-than-expected amount of cheap loans in the European Central Bank’s long-term refinancing operation.
The U.S. dollar traded broadly lower, with the euro bucking the trend.
The euro EURUSD -0.54% fell to $1.3446 from $1.3473 in North American trade late Tuesday. Against the Japanese currency, the euro EURJPY +0.01% also declined, down to ¥108.03 from ¥108.41.
The shared currency traded near $1.3460 ahead of the LTRO announcement and had changed hands above $1.3480 in earlier activity in Asia.
The ECB said 800 banks borrowed 529.5 billion euros ($713.4 billion) in three-year loans at the central bank’s refi rate of 1%. Ahead of the operation, surveys showed economists expected a figure near the €489 billion borrowed by more than 500 banks at the first three-year operation in December. See story on ECB’s LTRO.
“It appears that on the euro side there has been some ‘sell the fact’ profit taking,” strategists at UBS said.
“It has always been clear that there are competing forces, with a large LTRO positive in terms of removing tail risks but negative in terms of expanding the monetary base,” they wrote in a note to clients.
Traders were also set up ahead of the operation to keep the euro from rallying to $1.35, said Boris Schlossberg, director of currency research at GFT.
Market chatter indicated massive sell orders for the euro-dollar pair ahead of the $1.35 level, with option players “likely to put up a strong defense” in an effort to keep the pair below that level, he said.
Still, the ECB action should boost near-term appetite for risk, he said in emailed comments. A strong rally by U.S. equities could see the euro again challenge the $1.35 level, while the Australian dollar AUDUSD +0.38% could rally through $1.09 on the same flows, according to Schlossberg.
In recent action, the aussie rose to $1.0841 from $1.0772 in late trading Tuesday.
On the downside, failure by the euro to hold support at $1.34 could trigger a sharp selloff, Schlossberg said.
Rising risk appetite
In the immediate aftermath of the announcement, risk-oriented currencies such as the New Zealand dollar, the British pound, the aussie and emerging-market currencies gained ground while the euro eased, UBS noted.
Coming up, Federal Reserve Chairman Ben Bernanke will testify to Congress and is expected to maintain his stance on easy U.S. monetary policy.
Against this backdrop, the dollar lost ground against the Japanese yen, British pound and Canadian dollar, weighing on an index that tracks its performance against a basket that includes those currencies.
The dollar index DXY +0.34% briefly erased losses but lately stood at 78.206, down from 78.222 on Tuesday.
The British pound GBPUSD +0.46% rose to $1.5955, compared with $1.5899 Tuesday.
Against the yen, the dollar USDJPY +0.58% fell to ¥80.34 from ¥80.50 late Tuesday.
The greenback fell 0.5% against the Canadian dollar USDCAD -0.96% to buy 98.94 Canadian cents.
