Good morning

FX markets open this morning after spectacular moves post FOMC meeting. the FED’s Yellen added little in the way of the timing of any rate hike in the US, giving the USD and stocks the push they needed. S&P touching new highs, Dow-Jones touching new highs, €/$ breaking lower from 1.2950 at the start of the meeting to touch 1.2850 (recovered somewhat to 1.2880 now), £/$ following down from 1.6330 to 1.6250 (recovered somewhat to 1.6290 now) and $/JPY breaking new highs rising from 107.30 yesterday to a high of 108.87 (currently 108.70). As we have noted on previous occasions, we LOVE the USD and more importantly we like the FED have noted that the US is getting stronger and stronger which will add fuel to the USD’s fire.

FX volatility levels (strangely) have come off strongly in €/$, falling from 7.40 mid to 6.50 mid (1m) as I write this. What this tells me is the market is LONG vol/gamma down here and not wanting to buy any more. When the traders are already long vol, the last thing they want is to keep vols artificially inflated and risk getting given more vol by the street. Granted they will have suffered mark to market losses on the vol reval but their gamma more than makes up for this. Having said this, be rest assured, if the USD continues to march lower, and enter “new” territory, option market makers will start to mark vols higher as we enter a new dawn.

GBP/USD volatility has also come off (as I have noted previously) down from 9.2/9.5 to 8.6/9.2 presently. Now that the Referendum has started it is likely that the GBP will trade sideways today, with (in my opinion) moves (higher) starting to take effect towards 10pm and the closing of the poll. I am (cautiously) optimistic the NO camp will win. However PLEASE bear this in mind (and it is something I have written about many times), if the NO camp wins by a “small” majority, while I still see the GBP/USD recovering, I think it will be a big figure at best before spot falls back to current levels. The reason is while a win is a win, it was not a flattering pouncing. So what we need to see is an impressive pouncing (NO trounce the YES). A result like this is a major triumph and a big boost to the Govt. that the people have spoken and the economy will not be tainted or affected. A good result for the NO’s can see GBP/USD shoot up towards a 1.65 handle, leaving EUR/GBP teetering just above 0.7800 which short-medium term is a target many GBP traders will agree on.

The Fed did not remove the word “considerable” regarding the timing of the first rate hike. Furthermore, Yellen commented that there is still under utilization in the labor market. As noted previously, I see a hike in (Q1) 2015 and an explicit declaration that QE ends in October. All in all there were no shocks to the statement. Stocks and the USD basically loved the statement. Gold on the other hand (again as ParityFX has predicted) fell from $1234 to $1222 (short/med. term target $1025.

The first round of the ECB’s Targeted-LTRO (cheap loans) are expected to be announced today. As it is the first round, the ECB will tread cautiously with a contribution of between EUR150-200bn.  A big take up by the banks, basically means that there is more money in the EU-zone, which could lead to a further fall in the EUR. As it is the first such announcement, we are likely to see increased movement and volatility in the €/$, which as I noted above leaves me a little confused as to WHY the options market has smashed front end EUR/USD vol to such an extent. Given the importance and significance it is my opinion that vols should have retreated a tenth or so, rather than 0.50% (1m). But as noted above, the market must be so long front end vol, there was no other option (given the FOMC event risk was out the way) but to revalue front end volatility lower.

In the excitement of the ECB liquidity action and the Scotland Independence vote, we must not lose sight of other key event risk today. The Swiss National Bank rate decision came out earlier as expected at 0.00%. The ECB has committed to expanding its balance sheet and thereby driving its currency lower. That creates a conflict for the SNB as their job and promise to the market is to keep EUR/CHF above 1.2000 (currently 1.2080). We have seen over the past few years potential attacks on this level only for the SNB/BIS to heavily intervene in the spot market and BUY EUR/CHF. The move will be heavily felt in USD/CHF given the clash between the SNB and ECB on the level of the EUR itself.

Last but not least, under normal circumstances UK Retail Sales would have a say in what the GBP/USD & EUR/GBP does on the day, but then again today is by far not a normal day, therefore I expect the number to be “ignored” for the most part.

Good luck today and go well