Tomorrow is a leap day which brings what is arguably the feature news event of the week. At around 1015 GMT, the European Central Bank (ECB) is expected to publish the results of its second long-term refinancing operation (LTRO).

According to a Reuters poll of 30 euro money market traders conducted on Monday, the consensus expectation is an allotment of €500 billion, with forecasts ranging from €200bn to €750bn.

On December 21, in its inaugural 3-year LTRO, the ECB allotted to 525 European banks a total of €489bn. Prior to that first LTRO, a Bloomberg News survey of economists showed a median forecast of €293bn, with estimates ranging from €150bn to as much as €600bn. Banking analysts have reported that results of these new LTROS are difficult to predict as the forecasting process involves gauging funding and liquidity pressures in the eurozone and predicting banks' behaviour.

If the ECB shows notably larger than expected demand for what has been dubbed "LTRO 2," the market might conclude that the results suggest persistently large problems in the banking sector, sparking a euro sell-off. Following the release of results for LTRO 1 on December 21, the EUR/USD initially spiked higher, then fell 170 pips.

Olsen's Scale of Market Quakes (SMQ) confirmed that the release of the LTRO 1 results shook the euro more than any other event during the week leading up to the Christmas holiday.

Conversely, a lower-than-expected LTRO 2 allotment could give more juice to the recent euro recovery. Of course, the extent of any post-LTRO euro rally could depend in part on how much the market has "priced in" a good outcome.

Whatever the results, it's certainly reasonable for traders to expect an increase in volatility on the EUR/USD currency pair during the 1000 GMT hour on leap day.

Curt Wehrley
Currency Coach and Quantitative Analyst
FX Bootcamp
www.fxbootcamp.com