FOREX NEWS - Euro gains, focus squarely on ECB cash infusion

FOREX-Euro gains, focus squarely on ECB cash infusion Tue Feb 28, 2012 4:39pm EST * ECB cash move seen having 500 bln euro take-up * Higher demand for ECB cash likely to boost euro further * Size of ECB LTRO seen swaying euro sentiment By Julie Haviv NEW YORK, Feb 28 (Reuters) - The euro rose against the U.S. dollar on Tuesday as investors embraced risk ahead of a European Central Bank offering of cheap cash to banks, but the results of the auction will be key to whether the single currency can sustain its momentum. Investors awaited Wednesday's ECB Longer Term Refinancing Operation, an offer of cheap money aimed at providing support for companies that have been starved of investment funds. The ECB's first operation in December has been acknowledged as fueling the risk rally by encouraging banks to borrow from the central bank and purchase higher-yielding European sovereign bonds. The auction helped bring the yields of debt-burdened countries such as Italy and Spain down significantly and allayed contagion fears stemming from Greece. Risk appetite has certainly improved in 2012, with the Standard & Poor's 500 stock index up a whopping 9 percent while the euro/dollar has gained 4 percent. The higher-yielding Australian and New Zealand dollars are up 5.4 percent and 7.6 percent respectively against the greenback. "We do not expect the same intensity of risk rally to follow (tomorrow's auction), as the surprise has been muted by the results of the LTRO1," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "The risks are that too large a demand would have a stigma attached to it but too small would imply that the risk rally won't be supported." So, for current market trends to remain in place, the ECB's LTRO will need to fall very close to 500 billion euros, she said. A Reuters poll showed that banks will take up half a trillion euros of ECB funds, roughly the same as last time. This would be seen as buying more time for authorities to resolve the sovereign debt crisis. News that Ireland will hold a referendum on Europe's new fiscal treaty kept euro optimism contained. The announcement from Irish Prime Minister Enda Kenny set the stage for the first popular vote on the German-led plan for stricter budget discipline across the region. The euro rose 0.5 percent to $1.3458, with the session peak at $1.3470, near the three-month peak of $1.3486 set on Friday. Traders cited offers at $1.3480 and a reported option barrier at $1.3500, which would check gains. Immediate support was seen in the $1.3357-66 area around recent lows. Barclays Capital said it conducted an informal ECB LTRO survey of 204 of its clients, ranging from institutional asset managers to banks, macro hedge funds and reserve managers. Trade in higher-yielding currencies such as the Mexican peso, South African rand, Australian dollar, Brazilian real, Indian rupee and Russian ruble was the most favored strategy for 32 percent of the respondents in the event of a positive LTRO surprise, in line with Barclays' view. But over 22 percent of the bank's respondents believe EUR should outperform USD, and nearly 24 percent believe that long carry funded with USD is likely to outperform -- implying that 46 percent of Barclay's Capital's clients consider a large LTRO auction positive for the EUR, against the bank's view. "The survey found that 64 percent of the banks outside of the euro area and 48 percent of the banks in the euro area expect the EUR to rally in the event of a larger-than-consensus LTRO, strongly against our view that the EUR should weaken under that scenario," the bank said. YEN CHOPPY U.S. data on consumer confidence, manufacturing and home prices swayed the euro early in the session. The U.S. economy is showing signs of a more sustained recovery, pushing Treasuries yields higher. That had driven the dollar up against the Japanese yen this month. A record Japanese trade deficit, shrinking current account surplus and surprise policy easing by the Bank of Japan also weighed on the yen, putting it on course for its sharpest monthly drop in two years. The dollar was last down 0.1 percent at 80.46 yen, a day after hitting a nine-month high. "Any retracement that we see in the dollar will be a good opportunity to position for more yen weakness," said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Capital Partners in London. "We are positioning for the dollar to rise to 85 yen in the next three months." The euro climbed to 108.34 yen, 0.4 percent higher, but well off Monday's four-month peak. Daily Forex Market News
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