Markets Brace for More Volatility on ECB TLTRO, Scotland Referendum

Currency markets are bracing for another day of breakneck volatility as the ECB launches its TLTRO facility and Scotland votes on seceding from the UK.

Talking Points:

• Franc May Decline if SNB Threatens to Expand Anti-Deflationary Measures

• Euro Could Bounce as Strong TLTRO Uptake Cuts Stimulus Expansion Bets

• Pound Volatility in the Cards as Scotland Independence Referendum Looms

The FOMC monetary policy announcement fueled sharp volatility across currency markets but this marked just the beginning of a marathon of tectonic event risk facing investors. The least potent and most localized of the bunch is a rate decision from the Swiss National Bank.

While SNB Chairman Thomas Jordan and company seem unlikely to adjust the policy mix for the time being, they are surely watching the downward drift in EURCHF toward their established floor at 1.20 as ECB stimulus expands. If that spurs officials to threaten further anti-deflationary measures in the policy statement or prompts a large downward revision in the inflation outlook, the Franc may come under increased pressure.

Shifting focus to the European Central Bank itself, traders will be on the lookout for the results of the first TLTRO operation. As we discussed in our weekly Euro outlook, key variable in play will be the size of the liquidity provision taken up by banks tapping the facility. A survey of economists polled by Bloomberg puts the median forecast at €150 billion for today’s outing. In a somewhat counter-intuitive turn of events, a larger-than-expected capital allocation seems likely to offer support to the Euro.

The ECB has seemingly deployed every stimulus tool at its disposal short of “classic” QE, an option strongly opposed by the likes of Germany. Indeed, the TLTRO effort will be aided by a record-low baseline lending rate, a negative deposit rate, as well as purchases of asset-backed securities and covered bonds.

That means strong TLTRO uptake might be seen as lifting pressure to ease further and giving policymakers room to shift to wait-and-see mode. This may in turn fuel speculation that the single currency has fallen substantially enough to price in the degree of accommodation already on the table, prompting a round of profit-taking on highly elevated speculative short positions and sending the common unit upward.

Finally, the spotlight will shift to the Scottish Independence Referendum. Opinion polls ahead of the ballot essentially point to a 50/50 chance that Scotland will secede from the UK. This implies that – whatever the final result – a surge of volatility is likely to accompany the outcome as those on in the wrong are forced to readjust positions.

Scottish secession would be an unprecedented development with broadly unknown implications. That means a victory for the “yes” camp is likely to sink the British Pound as capital flees the uncertainty of GBP-denominated assets. An outcome close enough to leave room for dispute or the appearance of irregularities that threaten to discredit the tally may yield the same response. Alternatively, a clear-cut victory for the “no” campaign will probably boost the UK unit. Final results are due between 5:30-6:30 GMT on Friday.