Good morning,

What a few days we have in store. (1) MPC vote count 7-2 again, (2) US CPI (1.30pm), (3) FOMC Meeting (7pm), (4) Scottish Referendum (Thursday), (5) market reaction.

We are well in truly back to the good old days where event risk created an environment which traders and the like love to be involved in. Volatility is well and truly back. The fear of the unknown (regardless of the polls/spread betting results) are a melting pot for us traders as we come to terms with the ever changing economic climate. Everywhere we turn changes are taking place, the world’s economies are staging a comeback (well some at least) and things are starting to be clearer.

First came the news about Spain and the EU and their comments about Scotland joining the € and the EU. 5 years minimum if ever was the nuts and bolts of their comments. I sincerely hope people in Scotland are reading these stories because failure to do so will spell catastrophe for them. Then o/n the PBOC (China) will use their Standard Lending Facility to add 500bn in liquidity. This is tantamount to a rate cut or better yet QE (Quantitative Easing) by pumping money into their economy to stir it up. AUD /USD was the main beneficiary of course moving from 0.9010 to 0.9070 currently.

As far as today goes, we think Pres. Yellen (FOMC Gov.) will remove the word “considerable” regarding the timing of the first rate hike, as the US economy shows terrific Resilience and growth prospects. These numbers cannot be avoided, despite the “disappointing” NFP numbers earlier this month. We still believe the US is getting stronger by the day and this in itself is lending immeasurable support for the rest of the world. You know the saying, when the US sneezes, the world catches a cold. Well when the US gets better, the world gets better, it is as simple as that. So for this reason I think the US will hike EARLIER than expected (Q1 2015) and what’s more I am still calling for a EUR/USD rate circa 1.2000 by 31 December 2014.

With regards to the Scottish Referendum tomorrow, I have said so much that I might as well just regurgitate what I have already said previously.  FROM YESTERDAY:  “It is my opinion that the NO vote will prevail and what we are witnessing in the FX markets are common behavioral patterns. The markets is “priming” itself in that it “sells the rumour, buys the fact”. In other words it will drive GBP/USD lower (EUR/GBP higher) ahead of the result, start buying GBP against both the $ and € and then once the polls/results are announced the inevitable knee-jerk reaction ensues which drives GBP higher at an almighty pace. At the same time, GBP volatility will “collapse” as the event risk is now out the way. It was for this reason that last week I suggested BUYING 2 week GBP volatility vs SELLING 1 month volatility. What this would have given you was “gamma” ahead of the election, and post-election allowing you to make money from a move (either way) in the GBP. Once that 2w option expired, and with volatility now depressed, you would have been in a position to buy you 1m (now 2w expiry) option back at a lower volatility level. Classic calendar spread taking advantage of the event risk”.

Now with 24 hours to go, this has exactly what happened. They drove GBP/USD below 1.6200 to a level they felt comfortable, and then they dived in, driving the GBP up to 1.63 handle as we speak.  While today will continue to trade erratically,  the market has to wait until the results are published to rubber stamp their intentions. This is why i LIKED buying gamma (suggested this early last week) as it gives you the opportunity to make money from positive gamma.

Scottish independence is a wonderful thing. However while it could live in fairy tales, in reality I just do not see it happening. Banks, FTSE companies,  global Companies, EU countries and the EU itself ALL coming out in favour of NO camp and commenting on the potential disaster should Scotland go it alone. How people are able to neglect these comments and think they are purely scaremongering is beyond me. It is like me going into the ring with Floyd Mayweather  thinking I have a chance of knocking him out….erm NOT A CHANCE (and I am tough ha ha). I have to listen to my trainer, my friends, fellow professionals and others who know best. I will therefore thank Mr Mayweather for the chance to face him in the ring, concede defeat and know that at least I will have a long and fruitful life. Can the YES camp NOT SEE THIS? Best they remove their blinkers before it is too late.

FX volatility levels remain bid with the EUR/USD 1m 7.30/7.50 (-0.20%), 6m 7.25/7.45 (-0.25%), 1y 7.75/7.90 (-0.25%) — GBP/USD 1m 9.10/9.90 (unch.), 6m 7.20/7.80 (unch.), 1y 7.40/7.90 (unch.) — EUR/GBP 1m 9.10/9.90 (unch.), 6m 7.15/7.70 (-0.15%), 1y 7.40/7.90 (unch.) — Remember it is not about the back end volatility, it is all about GAMMA and the front end which explains why in the numbers above there is little to no movement in 6m+1y GBP vol. Post FOMC and Referendum though, as long as there are no shocks, I think front end vol will come under severe pressure as the markets digest the news and more importantly the “event risk” is passed.

Good luck today