12 September 2014

Trading GBP ahead of Scottish referendum?

Sterling traders will have a keen eye on this week’s events in Scotland. Polls show that this will be a closely fought contest with an outcome that, whichever side proves to be successful, is sure to affect both the UK economy and currency in one direction or another.
​​​​​With 97% of Scotland's population registered to vote in Thursday’s referendum on independence, there is no doubt that the outcome of the vote will be a reflection of the national mood towards the union formed with the United Kingdom. It is the outcome itself, however, which is less certain. A month before this Thursday’s key date, a poll conducted by The Sunday Times saw the lead for the 'No' campaign fall from 22 points to 14 points, taking those in favour of a 'Yes' win to 57%, compared to 43%.

At this point, GBPUSD was standing at the 1.6700 mark. On September 6, with just twelve days remaining, it was revealed by the same newspaper that the 'Yes' campaign had taken a two point lead. This rocked the market, with GBPUSD moving below the 1.6100 figure for the first time since November last year. The currency pair had already begun to move lower after the second televised debate between Alex Salmond and Alistair Darling, with the leader of the Scottish National Party widely reported to have won. Although polls published over the weekend have ultimately pointed to a small advantage for the 'No' campaign.

The market already had a taste of what may occur should the 'Yes' campaign prevail on Thursday. The slip in GBPUSD to lows painted a worrying picture. Those in favour of independence have commented that there is a great deal of economic scaremongering occurring. However, statements from banks and large companies indicating they are ready to move their registration from Scotland to London in the event of a win for the 'Yes' vote cannot simply be ignored.

Supermarkets in particular have warned that retail prices may spike should Scotland become an independent nation, whilst the Bank of England governor Mark Carney has warned that years of austerity would have to take place within Scotland in order for the nation to build the necessary currency reserves that it would need to adopt a functional peg to sterling. A currency union without a political one would be inconceivable it seems and the chances of Scotland applying and becoming a member of the EU quickly are limited.

What does this mean for traders?

Traders will brace themselves on Friday morning for an unexpected outcome which could possibly lead GBPUSD to trade below the 1.6000 figure and continue lower. One question to ask is where Cable and EURGBP in particular may trade should the 'No' campaign prove victorious. An initial rise in Cable to those levels witnessed before September 6 is likely to be targeted.

Despite a marginal lead in the polls, a ‘Yes’ vote is still viewed as unlikely. A depreciation in sterling would be far more dramatic than any upsurge, as the mess caused by independence would be far more difficult to deal with.

This whole scenario is unlikely to subside in the longer term even if Scotland should remain a member of the union. The figure of £218 billion worth of assets moving out of the UK in the event of independence will not be so large with a 'No' as the answer on Friday morning, but the withdrawal of assets and similarly damaging consequences may still occur.
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