Mixed Signals Ahead of LTRO & Cause/Effect Analysis

Mixed US data on durable goods orders and consumer confidence as well as the announcement of an Irish referendum led to choppy trading. EUR was the best performer while NZD and USD lagged. Markets are unlikely to make large moves ahead of the LTRO. EURUSD premium trades awaiting to be filled. See Ashraf's Cause & Effect Analysis Ahead of LTRO. Ashraf will preview the LTRO on CNBC, Tuesday at 6:20 am GMT.

US durable goods orders fell far short of expectations, with non-defense capital goods orders ex-air falling 4.5% compared to -1.3% expected in January. There was talk of skew in the data due to the beginning of the quarter and year but it raises questions about the sustainability of the US recovery.

On the other hand, consumer confidence hit a one-year high of 70.8 compared to 63.0 expected and the Richmond Fed climbed to +20 versus the +14 consensus.

The euro briefly fell below 1.34 after Ireland decided to put the new US fiscal oversight rules to a referendum. The losses were short-lived and EUR/USD rallied to 1.3469 shortly afterward.

Wednesdays LTRO, to be revealed at 1015 GMT, is a major risk event. The consensus on the take up is for just under 500 billion euros. Anything from 375B to 600B may not have a huge effect so long as the number of banks participating is high. The knee-jerk reaction to a disappointing number would be a drop in risk appetite due to perceived risks in European banking and less cheap money to flow into sovereigns. The knee jerk reaction to a high take-up will be to buy euros. Over time, however, both knee jerk reactions may be reversed depending on how sovereign bonds and bank stocks react.

CAUSE & EFFECT ANALYSIS PRE-LTRO

Ashraf told the media earlier today that markets were looking at the LTRO from a CAUSE & EFFECT stand point; If the LTRO take up is on the lower end (less than EUR 300 billion) then markets may focus on the CAUSE being that banks require less support, which is a positive. In the case of a larger than expected take-up (above EUR 1 trillion), markets may also deem it as a positive because they would focus on the EFFECT this would have (further lowering bond yields and shoring up banks).

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