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FOREX-Euro suffers post-ECB blues; downside seen
March 1, 2012 / 10:30 PM / 6 years ago

FOREX-Euro suffers post-ECB blues; downside seen

* ECB cash injection makes euro attractive as funding currency

* More downside seen for the single currency

* AUD, NZD and CAD all gain ground

By Ian Chua

SYDNEY, March 2 (Reuters) - The euro was on the backfoot in Asia on Friday, having fallen to one-week lows against the greenback and other currencies in a move seen likely to continue after this week’s massive cash injection by the European Central Bank.

The single currency stood at $1.3314, having briefly dipped below $1.3300 overnight. It slid past 108.00 yen again and touched a 1-1/2 week low around A$1.2310 .

Analysts said the take-up of half a trillion euros of cheap ECB cash (LTRO) by Europe’s banking system amounted to a form of quantitative easing (QE), which makes it attractive to use the euro as a funding currency to buy higher yielding assets.

“Risk-on positioning could continue to be funded by short euro positions following the LTRO,” said analysts at BNP Paribas.

The euro has retreated some 1.3 percent on the greenback since the ECB cash bonanza. Markets had cut bearish positions in the lead up to the central bank largesse believing it would ease bank funding strains and support the sovereign bond market.

A surprise easing by the Bank of Japan a couple of weeks ago has similarly weighed on the yen. In contrast, the dollar found some reprieve this week after U.S. Federal Reserve Chairman Ben Bernanke stopped short of signalling more stimulus.

The greenback rose to a one-week high against a basket of major currencies, although its rally on the yen looked to have lost some steam.

It bought 81.07 yen and has been struggling to break higher since surging 6.6 percent in February to reach a nine-month peak of 81.61.

Still, the outlook for the G3 currencies against higher yielding assets remains dim.

“Synchronised QE will continue to undermine G3 currencies against anything that is allowed to appreciate, and boost asset prices everywhere,” analysts at Societe Generale said.

It’s not surprising then that commodity currencies were among the big winners overnight. The Australian dollar stood at $1.0815, within striking distance of a seven-month high of $1.0857 set on Wednesday.

This price action is keeping intact the next target of $1.1000 and then the post-float peak of $1.1081 set last year.

“Now that the ECB’s long-term refinancing operation has come to pass, there’s an additional 529.5 euros billion of excess liquidity floating in the financial system,” said Christopher Vecchio, currency analyst at DailyFX.

“While the measures will ultimately prove dilutive to the euro, they will continue to spur the flight to riskier assets. The commodity currencies - the Australian, Canadian, and New Zealand Dollars - should be well-supported over the next week, barring some unforeseen tail-risk or dramatic downturn in global growth data.”

Japan’s consumer inflation and jobs data is due this morning, followed by German retail sales and euro zone producer inflation data.

In Europe, Greece moved a step closer to getting a second bailout by taking all the legal action needed to secure the money.

The International Swaps and Derivatives Association also decided on Thursday that Greece’s efforts to cut its debt burden has not yet triggered payment on bond insurance contracts.

However, market participants still expect an eventual payout on credit default swaps. (Editing by Wayne Cole)

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