Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 17 September 2014 at 9:00 GMT

Bull or bear? GBP's where it's at for this Scottish vote

Chairman, Saxo Capital Markets UK Limited / Saxo Bank
United Kingdom
  • GBPUSD has fallen to 10-month lows ahead of Scots vote
  • A No vote could result in a rally, making current prices attractive
  • The Scotsman poll on eve of vote has Yes vote at 48%

By Nick Beecroft

Who'd trade GBP in this environment? Well, actually, the smarter trader would undoubtedly be sensing an opportunity. Nevertheless, as we enter the last full day of campaigning, traders are in a quandary. 

Taking insurance against a Yes vote has spiked as two-week GBPUSD implied volatility straddling the day of the vote has risen to 12%. If the No vote wins the day, that threatens to blow a hole in your wallet if you're not careful.

Do the polls offer much of a clue here? Possibly not given the margin for error. A poll for daily newspaper The Scotsman put the Yes vote at 48%, still lagging the No vote but clearly indicating it has momentum on its side. With the reliability of such polls in question, and the closeness of a number of polls in the last ten days or so, it has simply become too tight to call.

In such an environment, that has seen GBP slide to 10-month lows against the USD and even GBPEUR has set off on a downward trajectory in the last week. Meanwhile, hedging costs against sharp swings from a possible Yes vote to end the union has soared significantly. 

One-month implied volatility for GBP subsequently spiked to a 14-month high.

If the No vote succeeds, GBP could start the long march back up towards the 1.6500 area and perhaps higher. Sterling’s current valuations would start to look rather under-valued underpinned by the recent indications from Bank of England governor Mark Carney that UK interest rates could rise as soon as the spring of 2015.

If GPB bulls were ever in need of a signal, that was a pretty clear one there.

Mark Carney
With the BoE's Carney signalling rate hikes, GBP
could be poised for long-term gains. Photo: Getty

However, traders preparing for this eventuality risk exposure if the Yes vote succeeds. In this scenario, even at current levels, hedging positions against a break-up of the union may appear to be the cheaper option.

Rollercoaster ahead

One thing is certain. GBP will react to every new poll or market-moving event that occurs in and around the September 18 vote.

Further interventions along the lines of those made by the Royal Bank of Scotland and John Lewis last week can't be ruled out as the debate becomes ever-more shrill. 

We've also seen global investment manager giant BlackRock release a statement that it was shorting sterling by buying various derivatives and other fund managers have claimed investors are already withdrawing money from UK equity funds.

Any significant shift in favour of the Yes vote could see GBP continue to depreciate. Any relief rally of GBP in the event of a No vote could be short-lived as next year’s general election and then a potential referendum on European Union membership may weigh on financial market participants.

Will Scotland go?

Recent polls suggest Alex Salmond and his independence campaign have all but wiped out the lead that was enjoyed by Alistair Darling and the Better Together team for much of the campaign. 

While Darling was widely seen as having won the first televised debate with the Scottish National Party's Alex Salmond, Salmond undoubtedly turned the tables in the second round and helped to establish a momentum that has shown little signs of wavering,

The bookies favour the No vote, but only just. Ladbrokes and William Hill, the UK's two biggest bookmakers, are laying seven to four odds against a Yes vote. 

Alex Salmond
Alex Salmond's Yes campaign has gained a lot of ground, but remains dogged 
by questions about currency union and Scotland's EU prospects. Photo: Getty

-- Edited by Michael McKenna


Nick Beecroft is chairman and senior market analyst at Saxo Capital Markets UK

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