More LTRO Ahead Consumer Confidence Shrugs Oil

United States February Consumer confidence hit a 12-month high of 70.80, proving yet again that consumer confidence indices (Conference Board’s consumer confidence and University of Michigan’s consumer sentiment survey) are more impacted by equities rather than price of gasoline.

We haven’t seen the last of LTRO
The ECB may be faulted for not contributing to the PSI deal via its reluctance to accept haircuts, but its LTRO has proven integral in stabilizing yields, restoring market confidence & potentially enabling banks to absorb the impact of recapitalization required by next summer. Of the €115 billion needed in eurozone bank recapitalizations (must be achieved by June or face nationalization), 9% is needed for French banks, 40% needed between Portuguese, Irish and Greek banks and over 20% needed by Spanish banks alone.

As much as €2 trillion in assets potentially be slashed from eurozone banks by next year (total stands at €26.5 trillion) as the recapitalization process goes ahead. Other estimates see €5 trillion within the next 3-5 years. The greatest challenge of these recapitalizations will be choking off funds to real economy. Considering these shortfalls, it will be challenging for banks to transfer the ECB’s liquidity injections into the economy. Accordingly, LTRO is expected to resurface especially given its success in stabilizing market fears and improving banks; liquidity situation.

Currency Picks & Rationale
Although the Norwegian Krone has fared as the best among oil currencies so far this year, we pick the Canadian dollar going forward as the preferred energy currency, due to stabilizing dynamics from the US and Mexico, as well as the fact that the CAD is a more liquid and less volatile currency than NOK. Also, the Bank of Canada remains the only G10 central bank to not have eased monetary policy over the last 2 years.

EUR/USD seen extending gains towards 1.37, after which selling the highs is anticipated to be the preferred strategy instead of buying the dips. The contrast between the lack of policy progress on the eurozone debt front and the sentiment improvement courtesy of ECB’s LTRO, will reach the “fatigue phase” by early Q2.

GBP remains our least favoured currency due to continued slowdown in inflation paving the way for further asset BoE purchases, and the combination of required effort on the fiscal angle. The recent macro improvement has not been limited to the UK.