Unlikely to Produce Major Response from Price Action
• Australian, NZ Dollars Underperform Overnight as Asian Stocks Decline

Most major currencies were locked in narrow ranges against the US Dollar in overnight trade. The stocks-correlatedAustralian and New Zealand Dollar underperformed, down as much as 0.3 and 0.4 percent respectively, as Asian shares came under pressure amid Eurozone sovereign debt fears. The MSCI Asia Pacific regional benchmark equity index fell 0.6 percent as traders in the region took their opportunity to price in the outcome of the first ECB 3-year LTRO. The allotment details showed lenders borrowed €489 from the central bank – dwarfing estimates ranging in the €250-300 billion – to underscore the depth of the liquidity shortfall in the Eurozone banking system. The fact that a whopping 523 firms tapped the facility further underscored the dire situation, feeding fears of an oncoming credit crunch.

Looking ahead, the spotlight is on ECB President Mario Draghi and BOE Governor Mervyn King who will hold a joint press conference after a meeting of the European Systemic Risk Board (ESRB). The 3-month EURIBOR-OIS spread – a gauge of Eurozone money-market conditions that rises with increased funding stress – is hovering near the highest levels in three years. This coupled with yesterday’s LTRO allotment outcome suggest markets remain deeply concerned about a deepening liquidity drought that threatens to amplify the Eurozone debt crisis and further darken the region’s already dismal economic growth outlook. With this in mind, investors will be on the lookout for ideas on how the EU’s leading central banks can ramp up cash provisions if credit markets continue to tighten, with a perceived lack of urgency on the part of policymakers likely to translate to renewed risk aversion. Needless to say, such an outcome would bode well for the safe-haven US Dollar against its top counterparts, and vice versa.

The European economic calendar is relatively lackluster, with the final revision of third-quarter UK Gross Domestic Product reading amounting to the only somewhat noteworthy item on the docket. Expectations suggest the outcome will confirm initial estimates of a 0.5 percent increase in output in the three months through September. The news will not offer anything materially game-changing for the monetary policy outlook (particularly in the wake of yesterday’s Bank of England minutes release) and so seems unlikely to get much of a response from price action. Revisions of the US GDP and University of Michigan Consumer Confidence figures as well the weekly Jobless Claims data are on tap in the afternoon.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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