The ECB's big TLTRO disappointment isn't really that bad

While the Scottish referendum is likely to dictate market direction for the next two days, this morning it was all about Europe. Back in June the ECB announced that it would launch another round of cheap loans for the banking sector to help boost lending to the real economy. These new loans are called the Targeted Long Term Refinancing Operation (TLTROs), and allow banks to borrow money just above the ECB’s main refinancing rate of 0.05%, until 2018, as long as they “target” these loans to the real economy.

The ECB had big hopes for TLTROs, with nearly EUR 1 trillion on offer; however, things have got off to a fairly dismal start. Europe’s banks only bid for EUR 82.6bn, well below the market’s expectations of EUR 174bn, with some banking analysts looking for take-up to be as large as EUR 400bn.

Banks failed to come knocking on the ECB’s door, with most of the large banks taking relatively modest sums: troubled Italian lender Monte Paschi borrowed EUR 3bn, while Unicredit was looking for EUR 12 bn, Spanish lender Banco Poular borrowed EUR 2.85bn, while French lender Societe Generale also participated in the auction but declined to provide how much it bid for. These small sums are unlikely to help the ECB to its ultimate goal which is to boost the Eurozone’s sluggish economy and get the region out of deflation territory.

What does this mean for ECB policy?

Today’s disappointing auction does not mean that all hope is lost. There are 7 of these auctions in total, so the funds could go… eventually. Added to that, this auction takes place at a tricky time for banks, the results of the ECB’S own bank stress tests, billed as the test to end all tests, are due at the end of next month. No wonder banks are keeping their balance sheets as clean as possible and not engaging as anything that either makes them look like they are lending to risky borrowers, or that they are desperate and need cheap funds from the ECB to keep afloat. Thus, the ECB could have shot itself in the foot with the timing of this auction.

Is QE round the corner?

The disappointing take-up at this auction raises doubts about the ECB’s pledge to expand the size of its balance sheet back to 2012 levels. Although we think that further TLTRO auctions could see an increase in demand from the banks, the next one is in December once the ECB stress tests are safely out of the way, speculation could still mount that QE is around the corner. If the take-up after this auction is a sign of things to come, then TLTROs are not going to be enough to boost the ECB’s balance sheet, which may trigger more radical action from the ECB like full-blown, Fed-style QE.

The EUR: Scottish factor could weigh on the EUR

From a fundamental perspective there could be a double whammy of bad news for the single currency in the next 24 hours: firstly, the TLTRO disappointment, and secondly, the outcome of the Scottish referendum, which could have more bearing on the EUR in the next few weeks than domestic factors. A yes vote for independence could trigger the eventual break-up of the EU, if it makes a Conservative victory at next year’s general election more likely. The Tories have threatened to hold and in/out EU referendum for the UK in 2017 if they win a second term in power, and without the UK in the EU, we think that it will have to break apart. Thus, the outcome of today’s referendum could have repercussions far wider than UK shores.

The technical view:

Interestingly, the EURUSD is in recovery mode today after fresh selling developed on Wednesday. Even though the TLTRO news only knocked EURUSD back 30 pips, we think the fundamental factors remain weak for the EUR and any upside will be short-lived. Momentum looks like it is ready to cross lower once again. We continue to expect EURUSD to test 1.2797 – the 61.8% retracement of the July 2012- May 2014 bull trade (see figure 1). But beware; we could see deeper losses on the back of a Yes vote in today’s Scottish referendum…

EURGBP is also having a hard time today. The MACD has fallen below its zero line and the focus is now on 0.7874 – the low from 23rd July. Below here there is no major support until 0.7755 – the July 2012 low. However, this pair could be extremely volatile in the next 24 hours, as a yes vote for Scottish independence could trigger a sharp drop in the pound, even worse than any drop in the EUR, which could boost EURGBP. Key resistance lies at 0.8010 – Tuesday’s high, then 0.8075 – the 38.2% Fib retracement of the March – July sell –off.