Next week's LTRO repayments are of more interest than usual

Outlook:

In the US, we get some decent data at last after starving all week. Today it’s the Empire State manufacturing index, TICS capital flows, industrial production and the University of Michigan consumer sentiment index. Meanwhile, in the background, the right-wing think-tanks and politicians are busily supporting the sequester, saying it’s a tiny piece of a very big economy and let’s stop freaking out over it--the sequester is a good thing. There is certainly popularly thought to be enough waste at the Pentagon alone to run a small country. We don’t have a dog in this fight although becoming increasingly inclined to side with the Plubs on this one, if only because dampening down the fear factor is a Good Thing in its own right. Scare stories create the very thing they are warning and complaining about. Let’s hope the Dems don’t buy into the opposite point of view—the US needs that spending to keep the economy going—out of sheer orneriness. At some point we have to ask who threw whom into the briar patch.

We are starting to see a divergence between economic reality and sentiment. Draghi cured bad sentiment last July with “whatever it takes” and the negativity toward the peripherals has been on the downswing ever since, but sentiment leading to better bond yields is not manufacturing output or employment or less unbalanced budgets. The divergence is starting to affect other eurozone economies, what the FT calls FISH (France, Italy, Spain and Holland), each of which has a problem or two. This line of thinking remains a bit murky and we don’t yet have an answer to the “So what?” question. Maybe the answer is a disconnect between bond yields and currency levels—in other words, yields can stay tame while the euro weakens on the real economies. This is not the standard model, in which currencies have some relationship to the longer yield and they both have some relationship to the underlying economy-–but we have had major disruptions of this relationship for several years—dollar up on safe haven buying despite falling yields, to take the most prominent example.

That means next week’s LTRO repayments are of more interest than usual and for a different reason. Market News writes that next Friday the ECB will announce the second of the 3-year LTRO repayments. Last time, on Jan 24, the euro rallied whe nthe number seemed big. Current expectatiosn are for a repayment of about €200 billion—with a bigger number implying healthier banks and another euro boost. If banks do not make generous repayments, maybe it means they are using the ECB funds to continue to hold lousy assets. The chances of this are not low. Banks have been unwilling to take losses, especially in Spain, until the wolf is at the door.

If worries about the eurozone economy continue, so can the euro’s downward correction. Weirdly, assuming the dollar/yen returns to the upswing, and we are betting on Japan’s resolve and newfound machismo, that will make the euro/yen an interesting thing to watch—a race ot the bottom.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	92.60	LONG USD	STRONG	10 /17/12	78.71	15.00%
GBP/USD	1.5487	SHORT GBP	STRONG	01/18/13	1.5942	2.85%
EURO/USD	1.3342	LONG EURO	STRONG	11/26/12	1.2970	2.87%
EURO/JPY	123.55	LONG EURO	STRONG	11 /21/12	105.38	17.24%
EURO/GBP	0.8614	LONG EURO	STRONG	11/26/12	0.8095	6.41%
GBP/JPY	143.41	LONG GBP	STRONG	11/21/12	131.02	9.46%
USD/CHF	0.9219	SHORT USD	WEAK	01/30/13	0.9163	-0.61%
USD/CAD	100.20	LONG USD	STRONG	01/24/13	0.9993	0.27%
AUD/USD	1.0357	SHORT AUD	STRONG	01/28/13	1.0392	0.34%
AUD/JPY	95.90	LONG AUD	STRONG	10/17/12	81.19	18.12%
USD/MXN	12.6993	LONG USD	WEAK	02/12/13	12.7736	-0.59%