EUR at 1.3470, so Begins the Great Unwind

As LTRO funds are repaid, the focus is slowly shifting to how the ECB will scale back its extraordinary programs. The best performer last week was the euro while the Canadian dollar lagged. Asia-Pacific economic data is light to begin the week. In Thursday's Premium Insights, 5 hit all targets, 5 unfilled, 4 stopped out and 4 in progress.

The ECB said on Friday that banks will repay 137 billion euros in LTRO funding. The low-cost loans were used to finance bond buying and helped depress periphery yields. The repayment figure was higher than the roughly 100 billion euros that market participants were expecting.

The repayment begins this week and it raises some risks. Many banks were crowded in the 'Sarkozy trade' which was a carry trade into short-term periphery bonds. As this trade is reversed it could put upward pressure on 1-3 year yields. Gentle upward pressure would be euro-positive but a more abrupt risk could spark fears and a flight from the euro.

In Davos, comments from the ECB's Coene highlighted the changing priorities of the central bank as it slowly begins the march toward normalization. He said the ECB bond purchase pal would ideally be left unused. He added that the ECB could revise growth forecasts higher in March.

As the trading week begins, the lone data point to start the week on the Asian calendar is the Japanese corporate service price index for December. Economists forecast the measure will decline 0.5% year-over-year. This data point rarely moves the FX market.

Australian is closed for a holiday.

Commitments of Traders The weekly futures positioning data from the CFTC reflects the close last Tuesday. EUR net long 21K compared to +7K last week JPY net short 64K compared to -66K last week GBP net long 18K compared to +28K last week AUD net long 97K compared to +89K last week CAD net long 58K compared +69K last week CHF net long 6K compared to +13K last week

There are a couple takeaways. The market now comfortably long euros for the first time in years but it has been a slow process. Oftentimes a rally is easier to sustain when traders are slow and reluctant to join in.

It's a surprise to see the market long the pound despite the recent weakness. Although some indications are showing cable oversold, the continued net long position should give bears comfort.