Friday's FX Outlook

 | Sep 19, 2014 06:27AM ET

Scotland appears to go for “no” The pound rose in early European trading as the first results from Scotland showed the “no” vote against independence taking the lead. GBP surged, as was to be expected. It’s reached our initial target of 1.6500. Now it remains to be seen if the bulls have enough strength to push it to 1.6645. I would be hesitant to try to ride this one further. (See technical section for details.)

Longer term, a “no” vote does not mean no change. The UK political establishment has promised a variety of new measures of autonomy for the Scottish people if they vote no. Wales and Northern Ireland are bound to demand similar rights. And then there’s the major contradiction in UK politics: why do the Scots get to vote on all English affairs when the English don’t get to vote on some Scottish affairs? England may also ask for some measure of self-government. Longer-term, this decentralization could boost the growth rate of the UK and thereby support the currency. On the other hand, the only age group in Scotland that has consistently supported the “no” side is the over-65s. As these people die and the pro-independence youth cohort grows, pressure for another poll may increase. Remember that in Quebec, there were two polls separated by 15 years. That possibility might give the pound some risk premium, although to be fair, financial markets in general have notoriously short memories.

The ECB’s targeted long-term refinancing operation (TLTRO) program got off to a poor start yesterday. Banks took up just EUR 82.6bn of the approximately EUR 400bn that was available. On the plus side, it seems that e peripheral European banks took up most of the funds, which may help their beleaguered economies. On the other hand, the total amount taken up doesn’t even offset the EUR 132bn fall in lending to companies and households throughout the Eurozone over the last year. However, there are various technical factors that hampered yesterday’s exercise. These factors will not be such a big impediment when the next TLTRO takes place in December. But for now, it appears the ECB may have problems jump-starting the economy and moving inflation expectations. The 5yr/5yr inflation swap, ECB President Draghi’s favorite gauge of inflation expectations, is now a few basis points lower than it was at the time of his Jackson Hole speech, when he said that the ECB Council would have to take action to deal with the decline. The combination may increase the pressure on the ECB to boost its asset purchases. It certainly increases the expectations for the October ECB meeting.