Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

The ECB’s Big TLTRO Disappointment Isn’t Really That Bad

Published 18/09/2014, 13:00
Updated 18/05/2020, 13:00

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 (MILAN:CRDI) was looking for EUR 12 bn, Spanish lender Banco Poular borrowed EUR 2.85bn, while French lender Societe Generale (PARIS:SOGN) 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.

Figure 1:
EURUSD Daily Chart
Source: PLEASE NOTE THAT THIS IS A BLOOMBERG CHART AND DOES NOT REPRESENT THE PRICES OFFERED BY FOREX.com

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Original post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.