A take up of 500 billion euros, or more, by banks when Europe embarks on its second, long-term refinancing operation (LTRO) this week, will provide further positive momentum for the euro, says one strategist, who is calling for the single currency to hit $1.40 in the second-half of 2012.
“Our sense is that if you get at or above the consensus which seems to be 500 billion euros, that is going to be supportive for risk. At the moment that probably means U.S. dollar down, euro up,” Ray Attrill, Head of Forex Strategy, North America, BNP Paribas told CNBC on Tuesday.
According to a Barclays Capital survey, which polled over 200 clients on their expectations for the upcoming LTRO, the majority said they expect the uptake to be 450-600 billion euros.
The European Central Bank’s second LTRO scheduled for Wednesday will offer the region’s banks another round of three-year loans at an interest rate of 1 percent, aimed at boosting liquidity and reducing the risk of a funding crisis in the euro zone.
In addition to the ECB’s liquidity boost, Attrill believes another positive driver for the euro will be easing fears surrounding Greece’s debt situation.
The significant event risk related to the Greek bailout has passed, he said, adding that this may compel asset managers to get their European bond holdings “something close to benchmark”.
“That would mean some significant real money flows that drive the euro higher,” he said.
Discussing his call for the euro-dollar to hit $1.40, which is a 4.5 percent upside from current levels, Attrill adds that prolonged weakness in the greenback will also support the single currency.
“The U.S. dollar is still a fundamentally weak currency and I don’t think anything is going to change that in the short-term.”
However, the Barclays survey showed that majority of its respondents did not believe that the increase in liquidity would be positive for the euro. Only “46% of our clients consider a large LTRO auction positive for the euro.” the bank said.
Robert Sinche, Global Head of Forex Strategy, RBS also doesn’t have a bullish outlook for the euro, pointing to the expansion of the ECB balance sheet this week as negative for the currency.
“Based on our model for euro-dollar, a net 350 billion euro liquidity injection at the LTRO this week, all else equal, would likely weaken euro-dollar by about 1.5 cents,” Sinche said.
“Following the weekend during which the G20 withheld broader financial support for the Greek debt crisis, and with concerns over the outcome on the Greek private-sector debt swap, it appears further euro upside is very limited,” Sinche added.