Forex Market Review – Euro lower after LTRO; AUDUSD hits 6-mth high

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The euro fell after the results of the European Central Bank’s second LTRO (long-term refinancing operation) which was met with strong demand from 800 euro zone banks and with a total allotment of 529.5 billion euros. This was above the 489 billion euros lent to 523 financial institutions at the first three-year LTRO in December.

In the buildup to the LTRO today, risk appetite was high, as concerns about a liquidity crunch were eased due to the ECB cash injection. Euro hit a three month high against the dollar and investors preferred to take profit today. It was case of “buy the rumour, sell the fact”. EURUSD reached an early European session high of 1.3478 and fell to a low of 1.3421.

Euro fell the most against higher-yielding currencies like the Australian and Canadian dollars.  The flood of cash was expected to encourage carry trades where investors use lower-yielding currencies to buy riskier assets and higher-yielding currencies.

The Australian dollar surged to a six-month high against the dollar and gained 0.6 percent against the euro. AUDUSD rose to 1.0854 from 1.0801. EURAUD fell from 1.2463 to 1.2388.

The Canadian dollar rose to a five-month high against its U.S. counterpart, pushing USDCAD down to 0.9869 from 0.9937.

Sterling climbed to a three-month high of 1.5957 from 1.5910.

USDJPY fell to 80.24 from a session high of 80.58 but reversed back up after U.S. GDP data showed growth was stronger than expected in the fourth quarter. The U.S. grew 3 percent in Q4.

The GDP data released towards the end of the European session helped euro bounce against the yen and USD as well. EURJPY had touched a low of 107.87 from 108.57.

The focus now turns to the U.S. Federal Reserve Chairman Ben Bernanke’s semi-annual testimony later to look for hints on whether further quantitative easing might be needed.  His speech could determine risk appetite.