Weekly Review and Outlook:Euro Tumbled after ECB LTRO; Focus Back on Greece and US Data

Price actions in the fx markets last week were quite complicated as several themes had impacts simultaneously. Firstly Euro was sold off steeply after ECB's three year LTRO result as the event provided no fuel to extend recent rebound. Focus was gradually turned back to Greece. Secondly, Bernanke refrained from giving any hints on QE3 in the semi annual testimony to congress and triggered sharp selloff in gold. However, dollar's strength was limited to against European majors and yen only. Aussie, Kiwi and Loonie were indeed very resilient. Thirdly, yen's selloff continues as comments from BoJ as well as weak inflation data suggests that we're still far from seeing the end of Japan's QE expansion.

Euro will likely remain weak in near term at least until Greece finally get the EUR 130b bailout fund on hand and settled it's March 20 bond payments. Yen will remain weak as expectation on BoJ expanding quantitative easing continues. The main question is which of dollar and commodity currencies would out-perform. The post Bernanke stock selloff and dollar rebound was a hint that markets are going back to the buy risk on bad US data for QE3 mode. However, that's far from being confirmed as while DOW struggled to stay above 13000 level after multiple attempt, there is no reversal yet. Commodity currencies' resilience could indeed be attributed to resilience in stocks globally. Hence, this week's Non-farm payroll report would be important in determining firstly, how investors now react to US data, and secondly, whether stock markets and commodity currencies would extend rally or reverse.

The ECB has allotted 529.5B euro of 3-year LTRO to 800 banks. Together with the first auction, the central bank has injected 1trillion of 3-year funds into the system. This amount equals to 131% total European bank bond maturities in 2012 and 72% for 2012 and 2013 combined. The average allotment is 0.66B euro, compared with 1B euro in December 2011 and 0.40B euro in June 2009. The total number of bidders is huge, suggesting participation of a lot of small banks. The ECB would probably view the result as positive as it's expected that the funds will be passed to the real economy. More in ECB Allotted over 500B Euro in LTRO.

Greece moved another step closer to getting the EUR 130b second bailout after parliament approved pension and health care spending cuts. The International Swaps and Derivatives Association said that their EMEA Determinations Committee unanimously ruled that there is no "credit event" in Greece so far in spite of the effort to restructure its debts. However, it's clear that Greece still needs to overcome an important hurdle of the PSI swap deal, which window closes on March 9 this Friday. Firstly Greece will need to complete the debt swap to secure the funding from EU and IMF. Secondly, there are still uncertainties on the participation rate and whether the collective action clause would be activated. And, thus, whether ISDA would declare a credit event finally is still uncertain. On Friday, Moody's downgraded Greece credit rating to C from Ca and said that the debt swap deal constitutes "a distressed exchange, and hence a default." Earlier in the week, S&P lowered Greece to "selective default" following Fitch's comment that it will further cut Greece's rating to "Restricted Default" once the bond swap is completed.

Other news saw the fiscal accord was finally signed by 25 member states at the EU summit today. Only UK and the Czech Republic opted out of the pact as we know. European Council President Herman Van Rompuy is optimistic that the fiscal agreement will have a "deep and long-lasting" impact on policies. Van Rompuy emphasized that "this stronger self-constraint by each and every one of you as regards debts and deficits is important in itself. It helps prevent a repetition of the sovereign debt crisis," and "the restoration of confidence in the future of the Eurozone will lead to economic growth and jobs. This is our ultimate objective." Next, the fiscal accord should be ratified by signatory countries' parliament. Spanish prim minister Rajoy said that the country will base its 2012 budget on a deficit target of 5.8% of GDP. That's clearly much less ambitious than the official EU agreed target of 4.4%.

In the testimony before the House Committee, Fed Chairman Ben Bernanke was less downbeat on the macroeconomic outlook. He stated that 'pace of the expansion has been uneven and modest by historical standard'. Yet, growth in the coming quarters is likely to be 'at a pace close to or somewhat above the pace that was registered during the second half of last year'. He also acknowledged positive developments in the job market including job gains that were 'relatively widespread across industries' and the 'more rapid than expected' decline in the unemployment rate over the past year. Investors were disappointed by the Chairman as he did not signaled further QE3. Instead, the acknowledgement of improvement in economic outlook might imply that the chance of such as quantitative easing has lowered. More in No Signals Of QE3 Disappointed Investors.

BoJ Governor Shirakawa pledged again today that the bank will "continue with monetary easing until consumer inflation of 1 percent is in sight". And he also emphasized that spike in energy prices alone is not enough to trigger policy reversal. Inflation data from Japan released saw national CPI core unchanged at -0.1% yoy in January. The Japanese yen was sold off since BoJ announced the inflation target of 1% last month and paved the way for further quantitative easing. It's believed that BoJ would finally be narrow that difference between size of QE program with Fed and other central banks.