FRANKFURT (MNI) – It is premature for the European Central Bank to
exit from the special measures it undertook to counter the crisis, but
it should start a careful preparation for the exit, ECB Executive Board
member Joerg Asmussen said in a newspaper interview released Wednesday.

Asmussen also told the German weekly Die Zeit that the two previous
three-year long-term refinancing operations (LTROs) conducted by the ECB
did not imply further such operations.

The relative calm seen since the start of year on financial
markets, a factor will determine the timing of the ECB’s eventual
unwinding of the anti-crisis measures, could yet prove an illusion, he
cautioned.

“The timing of the exit depends on developments on financial
markets,” he said. “It is clear that it is still too early to begin with
it now, but we have to start now to carefully prepare the exit.”

“One should not conclude from the fact that we twice extended
three-year credit to banks that we will automatically do so a third or
fourth time,” he added.

The crisis is not over, he said. “To be sure, the markets have
calmed down since the start of the year, but we don’t know yet if that
is a deceptive calm.”

In any case, he said, Eurozone member states should take advantage
of the opportunity to implement reforms.

Asmussen noted the existence of “first signs” that the ECB’s
generous provision of liquidity is “gradually” entering the real
economy. He insisted that banks must use profits resulting from ECB
policy to shore up their capital base.

Although the risks associated with collateral accepted by the ECB
in return for liquidity have increased, he conceded, “they are under
control.”

The ECB is watching asset market developments “very closely,”
according to Asmussen. “At the moment there are no signs of speculative
excesses Europe-wide, but the prices for real estate are increasing
noticeably in some regions of Germany, and we must observe that
attentively,” he said.

Despite the ongoing increase of economic heterogeneity in Europe,
the ECB must continue to ensure price stability for the region overall,
he said, leaving it to national authorities to counteract possible
problems “on individual markets.”

At the same time, an economic and fiscal union is needed to
complement the single monetary policy, he said.

There is consensus in Portugal, Ireland, Italy and Spain that
reforms are in the best interest of each of these countries, Asmussen
affirmed.

“In Portugal, for example, the foreign trade deficit, the budget
deficit and the labor costs too have decreased,” he said. “Naturally
more has to happen yet, but it is wrong to say that nothing is
happening.”

If there are any differences of opinion between the Bundesbank and
the ECB, these will be dealt with internally, he said.

–Frankfurt bureau tel +49 69 720142. Email: dbarwick@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]

• Monetary union can only work with fiscal union
• Europe must learn from Germany’s model
• ECB loans starting to reach real economy
• ECB balance sheet risks have risen but are under control
• ECB exit timing depends on market developments, but too soon to  start  exiting at the moment
• Crisis isn’t over yet
• Current lull should be used to implement reforms

We sit at 83.78, session high for the pairing.

Its been underpinned by Japanese  buying of yen crosses.  Reports have them buying CHF/JPY and CAD/JPY this morning.  Probably been in EUR/JPY too, but can’t confirm that.

Talk of decent-sized 84.00 option expiries today.

Buy orders clustered down at 83.40/50, sell stops seen through 83.30.  

Barrier options up at 84.25 and 84.50.

Congratulations Filippos…………….I think

TOKYO (MNI) – The Japanese government on Wednesday left its overall
economic assessment unchanged in its monthly report for March while
noting that firmer domestic demand is backed by an improvement in
business investment and consumer spending.

“The Japanese economy is still picking up slowly, while
difficulties continue to prevail due to the Great East Japan
Earthquake,” the government said, repeating its view adopted in
November.

“Concerning short-term prospects, reflecting the effects of policy
measures, a pickup trend in the Japanese economy is expected to take
hold,” it said, revising up its outlook slightly from last month.

Among positive factors are brighter U.S. growth prospects, easing
fears about the European debt crisis, global stock market rallies and
the yen’s fall from record highs, said Minoru Masujima, director of
macroeconomic analysis at the Cabinet Office.

He told reporters that domestic demand has become firmer.

The government revised up its assessment of private capital
investment for the first time in eight months, saying, “Business
investment is picking up recently.”

Capex rose 11.9% on quarter in October-December, posting the
highest gain since +12.1% in January-March 1989 at the peak of Japan’s
asset bubble, according to a quarterly survey conducted by the Ministry
of Finance.

The Q4 capex increase was led by the chemical and auto industries
that had to rebuild production facilities damaged by the March
earthquake last year.

Public investment is also solid, backed by fiscal programs to
rebuild the northeastern regions hit by the earthquake disaster.

The government also said consumer spending is firm. New vehicle
sales in Japan have been buoyant, partly because the government has
revived subsidies for buying low-emission vehicles.

Meanwhile, it renewed its warning that rising energy costs are
posing a downside risk to a sustained recovery in Japan.

tokyo@marketnews.com
** MNI Tokyo Newsroom: 81-3-5403-4833 **

[TOPICS: M$J$$$,M$A$$$,MAJDS$,MGJ$$$]

• Economy picking up slowly, remains in severe state after earthquake
• Recovery trend looks more certain
• Govt raises view on consumer spending for 2nd straight month
• Raises view on capital spending for first time in 8 months

Reuters reporting.

In recent trade.  Apparently circa 1.3275.  We’re touch lower at 1.3265.

Up at 1.3273 presently from North American close Tuesday down around 1.3225.

Talk of buy stops through 1.3285 now (if I traded it’s not where I’d put my stops, but hey ho there we go) before sell orders clustered 1.3300/25 according to Sean.

Congratulations to Sean on his info yesterday ala the sovereign buy orders 1.3170 (session low 1.3171) Bang on!!!

Talk of buy orders clustered down at 1.3200/20.

Let the games begin!!!

Financial bookies see DAX opening up as much as +0.4%, CAC 40 up as much as +0.7%.

FTSE pretty flat, expected up around +0.1%.

JAPAN DATA: Combined capital investment by small firms in Japan is
expected to fall 37.2% on year in the fiscal year 2012, preliminary data
released by the Shoko Chukin Bank showed on Wednesday. The figure is
lower than the preliminary figure of -28.6% for fiscal 2011 but higher
than that of -38.2% for fiscal 2010. Capex plan for fiscal 2011 was
revised upward to show -8.8% y/y. The bank surveyed 5030 small firms as
of Jan. 1. The bank plans to conduct a survey again on Jul. 1 and to
release revised figure for fiscal 2012 later this year. Japan’s small
firms tend to revise up their capital investment plans gradually as the
fiscal year progresses

Got any ideas you’d like to share with your fellow readers, then here’s where to stick ‘em.

JAPAN DATA: Domestic crude steel production totaled 8.608 million
tons, down 3.7% y/y in February, marking the sixth consecutive drop hit
by the strong yen, data from the Japan Iron and Steel Federation showed.
But the pace of decline slowed from -10.6% in January thanks to
leap-year effects and a recovery from the major flooding in Thailand
last year. Economists often use the data in forecasting industrial
output, whose Feb figures are due on Mar. 30. Steel production accounts
for around 6% of Japan’s manufacturing and mining production. The
federation estimates domestic crude steel output for fiscal 2011 at
105-106 mln tons, and the fiscal 2012 output above 100 mln tons but
below the fiscal 2011 level.

–Retransmitting Text Headlined 17:37 ET Tuesday

WASHINGTON (MNI) – The following is Federal Reserve Chairman Ben
Bernanke’s testimony prepared for the House Oversight Committee for
delivery Wednesday morning:

Thank you, Chairman Issa, Ranking Member Cummings, and other
members of the Committee for inviting me to testify about the economic
and financial situation in Europe and the actions taken by the Federal
Reserve in response.

Developments in Europe and Their Effects on the U.S. Economy

For almost two years, developments in Europe have had an important
influence on the tenor of global financial markets and on the global
economy more generally. The combination of high debts, large deficits,
and poor growth prospects in several countries using the euro has raised
concerns about fiscal sustainability and, consequently, led to sharply
higher sovereign borrowing costs — initially for Greece, but
subsequently for other euro-area countries as well. Pessimism about
these countries’ fiscal and economic situations, in turn, has undermined
confidence in the strength of European financial institutions,
increasing the cost and difficulty those institutions have faced in
obtaining funding and reducing their willingness to supply credit.

The difficulties in the euro area have affected the U.S. economy.
The European Union accounts for roughly one-fifth of U.S. exports of
goods and services. Not surprisingly, U.S. exports to Europe over the
past two years have underperformed our exports to the rest of the world.
In addition, weaker demand from Europe has slowed growth in other
economies, which has also lowered foreign demand for our products.

Financial strains in Europe have also shown through to our
financial markets. During times when financial conditions in Europe were
at their most turbulent, investors around the world retreated from
riskier assets. In the United States, these pullbacks decreased stock
prices, increased the costs of issuing corporate debt, and reduced
consumer and business confidence. In addition, U.S. financial
institutions that were thought to have substantial exposures to Europe
saw their stock prices fall and their credit spreads widen.

In the past few months, financial stresses in Europe have lessened,
which has contributed to an improved tone of financial markets around
the world, including in the United States. The improvement reflects, in
part, a number of actions taken by European policymakers. First,
measures taken by the European Central Bank (ECB), including
implementing two longer-term refinancing operations and easing
collateral rules and reserve requirements, have allowed European banks
to lock in funding for up to three years, thereby alleviating concerns
about their near-term prospects. With the benefit of this support,
European banks in turn have increased their holdings of sovereign debt,
contributing to lower borrowing costs for some countries.

Second, euro-area leaders, the Greek government, and private-sector
holders of Greek debt are taking steps to put Greece on a more
sustainable fiscal path. Its sovereign debt has been significantly
reduced, the Greek authorities are intensifying their efforts to
implement fiscal and structural reforms, and the European Union and
International Monetary Fund have pledged a considerable amount of new
funds as part of a second assistance package. The Greek economy remains
in a deep recession, however.

Third and finally, leaders of most of the members of the European
Union have approved a new fiscal compact treaty that strengthens fiscal
rules and their enforcement. This treaty represents a positive step
toward resolving the fundamental tension inherent in having a monetary
union without a fiscal union, and thus should help bolster the viability
of the euro-area economy in the longer term.

Although progress has been made, more needs to be done. Full
resolution of the crisis will require a further strengthening of the
European banking system; a significant expansion of financial backstops,
or “firewalls,” to guard against contagion in sovereign debt markets;
and, critically, continued efforts to increase economic growth and
competitiveness and to reduce external imbalances in the troubled
countries.

Actions Taken by the Federal Reserve

The Federal Reserve has followed developments in Europe closely,
and we are in frequent contact with key European policymakers. We are
particularly focused on protecting U.S. financial institutions,
businesses, and consumers from adverse financial and economic
developments in Europe.

To help calm dollar funding markets and support the flow of credit
to U.S. households and businesses, the Federal Reserve acted in concert
with major foreign central banks to enhance the U.S. dollar swap
facilities that were originally put in place during the global financial
crisis and reestablished in May 2010. Use of the reestablished lines was
limited until late last year. However, in late November, the Federal
Reserve agreed with the ECB and the central banks of Canada, Japan,
Switzerland, and the United Kingdom to extend the swap lines through
February 2013 and to reduce their pricing, from a spread of 100 basis
points over the overnight index swap rate to 50 basis points.1

The lower cost to the ECB and other foreign central banks enabled
them, in turn, to reduce the cost of the short-term dollar loans they
provide to financial institutions in their jurisdictions. As a result,
usage of the swap line increased considerably, peaking at $109billion in
mid-February. The expanded use of the swap lines has helped to ease
funding pressures on European and other foreign banks, lower tensions in
U.S. money markets (in which foreign banks are major participants),
alleviate pressures on foreign banks to reduce their lending in the
United States, and boost confidence at a time of considerable strain in
international financial markets. In recent weeks, as market conditions
have improved, usage of the swap lines has fallen back to about $65
billion.

I would add that the swaps are very safe from the perspective of
the Federal Reserve and the U.S. taxpayer. They present no exchange rate
or interest rate risk; each drawing has a short maturity and must be
approved by the Federal Reserve; they are collateralized by the foreign
currencies for which dollars are swapped; and our counterparties are the
foreign central banks, not the foreign commercial banks that receive the
dollar loans.2

In addition to its actions to reduce pressures in global markets
for dollar funding, the Federal Reserve has collaborated with other
agencies–both bilaterally and through the Financial Stability Oversight
Council–to monitor the potential vulnerabilities of U.S. financial
institutions and to work to enhance their resilience in the face of
possible shocks to the global economy. Notably, U.S. financial
institutions have very limited direct net credit exposures to the most
vulnerable euro-area countries, and U.S. money market funds also have
almost no exposure to those countries.

U.S. financial institutions do have some gross exposure to
potential losses arising from sales of credit default swap (CDS)
protection referencing European sovereign debt. However, for the large
U.S. dealer banks, these sales have been more than offset by purchases
of protection, which would imply that in the event of a sovereign
default, U.S. financial institutions would be net recipients of CDS
payouts. These positions still carry some risk in that some U.S. banks’
counterparties might conceivably fail to make good on their obligations,
but such risk is mitigated by the fact that the counterparties to large
U.S. dealer banks for sovereign CDS trades are dispersed, primarily
across large financial institutions. And in the vast majority of cases,
these institutions post collateral to each other to help minimize
possible losses.

Although U.S. banks have limited exposure to peripheral European
countries, their exposures to European banks and to the larger, “core”
countries of Europe are more material. Moreover, European holdings
represented 35 percent of the assets of prime U.S. money market funds in
February, and these funds remain structurally vulnerable despite some
constructive steps, such as improved liquidity requirements, taken since
the recent financial crisis. U.S. financial firms and money market funds
have had time to adjust their exposures and hedge their risks to some
degree as the European situation has evolved, but the risks of contagion
remain a concern for both these institutions and their supervisors and
regulators. In particular, were the situation in Europe to take a severe
turn for the worse, the U.S. financial sector likely would have to
contend not only with problems stemming from its direct European
exposures, but also with an array of broader market movements, including
declines in global equity prices, increased credit costs, and reduced
availability of funding.

-more- (1 of 2)

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]

• New Zealand Q4 current account deficit NZD2.8 billion
• NZ FinMin expects deficit to increase
• Australian economy: BREE sees higher resource and energy earnings
• China bank profits could be overshadowed by bad loans
• Copy of Bernanke’s prepared remarks published early
• Fed’s Kocherlakota hints at exit strategy
• Regional bourses -0.5% on average
• Gold $1652/oz; Oil $106.50/bbl

The Japanese financial markets were back on board today but they didn’t help with much improved volatility as we’ve again had fairly quiet trade in Asia. A minor AUD rally after the BREE report and a barrier play in EUR/JPY were the only moves of note.

AUD/USD opened in Asia near 1.0475, rallied in early Australian trade on a mixture of profit taking after overnight falls, and a reaction to the BREE report. The gains weren’t able to be sustained above 1.0500 and the pair fell back quickly below as the market frets on China. Ranges: 1.0464/1.0527

EUR/USD was again driven by EUR/JPY flows and there were also rumours of stop-loss buy orders in EUR/USD above 1.3285 but they seemed to be unreliable. EUR/USD opened at 1.3235 and has edged its way higher on the cross flows against the JPY and the AUD. Ranges: 1.3221/83

USD/JPY was supported by talk of Sovereign demand just below the market as well as ongoing buying of EUR/JPY. There are nevertheless still plenty of grateful sellers after the big rallies of recent weeks ensuring that we remain short-term rangebound. Ranges: 83.51/74

Cable 1.5854/94; EUR/CHF 1.2054/64

More from Bloomberg

–February New Projects Index Jumps To 63.4 From 61.2 In January

WASHINGTON (MNI) – The American Institute of Architects’
Architecture Billings Index rebounded slightly to a reading of 51.0 in
February after falling to 50.9 in January, marking a fourth consecutive
month of positive growth, the AIA reported Wednesday.

The ABI is a diffusion index, with any reading below 50
representing a decline in billings and reading above 50 representing
growth in billings. So, the February index reflects modest growth in
demand for design services.

Also in February, the new projects inquiry index rose to 63.4 from
61.2 in January, the highest reading since July 2007.

The AIA said that lag between the ABI and construction spending is
about nine months.

The AIA’s Chief Economist, Kermit Baker, said that the February
reading was “more good news for the design and construction industry.”

However, clients remain cautious about new projects and acquiring
financing remains difficult, both of are preventing a faster recovery,
Baker added.

The billings index was above 50 in the three of the four regions of
the country in February. The Midwest (56.0), South (51.3) and Northeast
(51.0) regions all remained above 50, while the reading for the West
(45.6) remained below 50.

The ABI remained above 50 in the multi-family residential (53.3),
commercial and industrial (52.1) and institutional (50.3) sectors. It
was remained below 50 in the mixed practice (46.3) sector.

National housing starts and permits data for February were released
on March 20 and indicated continued year/year improvement, though the
pace of starts fell slightly in February after seasonal adjustment.

The data on residential and nonresidential construction spending
for February are scheduled be released on April 2 at 10:00 a.m. ET.

** MNI Washington Bureau 202-371-2121 **

[TOPICS: M$U$$$,MAUDS$]

Latest musings from AEP who has thankfully moved on from his EUR bashing.

First the minutes from the last MPC meeting will be released and later in the day, the Chancellor of the Exchequer, George Osborne, will be giving his budget speech to the UK parliament.

Sell orders are still touted in the cable at 1.5920/25 but there are also reports of stop-loss buy orders above 1.5940 and again above 1.6000.

The twin forces of Sovereign buyers and rising US yields may yet prove irrestible to USD/JPY but for now at least it is still managing to consolidate below 84.15. This market has come a long way in a short time so its no wonder to see profit-taking halting the rally but if the big Sovereigns continue to turn up on dips (now rumoured at 83.20) then the next bullish break is probably only a matter of time.