Euro Maintains Gain Ahead of ECB 3 Year LTRO

Euro rise on broad based risk appetite and is trading back above 1.31 against dollar as markets are awaiting ECB's new 3-year LTRO operation today. Markets are expecting that banks would draw as much as EUR 300b of funds from ECB, at ultra low rate of 1%, the bank's benchmark rates. ECB President Draghi expected that there will be "very significant funding constraints" for 2012. This was echoed by Vice President Constancio who expected higher refinancing needs next. And thus, Constancio expected stronger demand in today's LTRO operation. Recent peripheral bond auctions have been very successful, especially in Spain as institutions are prepared to draw ECB's cheap money to invest in peripheral bonds, which in turn are also covered by ECB's relaxed collateral rules. While EUR/USD is kept below 1.32 key near term resistance level, development elsewhere, in particular in stocks and commodity currencies, argue that risk appetite is back for Santa Claus rally. Hence, we'd likely seen some additional strength in EUR/USD before the week closes for holiday.

BoJ left rates unchanged today at 0-0.1% as widely expected. Also, the bank hold off from additional monetary stimulus. Nonetheless, BoJ lowered its economic assessment again and noted that exports and production remained "more and less flat" and business sentiment improvement slowed. The bank expected the economy to return to a moderate recovery path as the pace of recovery in overseas economies picks up, lead by emerging and commodity-exporting economies, and reconstruction-related demand after the earthquake disaster gradually materializes". There are speculations that the BoJ might implement additional easing measures by March.

On the data front, New Zealand current account deficit widened to NZD -4.6b in Q3. Australian leading indicator rose 0.1% mom in October. Japan trade deficit widened to -0.54T in November. BoE minutes will be a main focus today as it should unveil unanimous vote to left policy unchanged in last meeting. UK public sector net borrowing is expected to rise to GBP 16.6b in November. Canadian retail sales are expected to rise 0.4% mom in October with ex-auto sales up 0.3% mom. Eurozone consumer confidence is expected to drop slightly to -21 in December. US existing home sales is expected to rise to 5.09m annualized rate in November.