Sterling markets are stirring on the risk of the U.K.’s 307-year-old union splintering, and that spells danger for the pound.
Britain’s currency is likely to weaken when markets resume trading after the weekend, strategists said following a poll that showed the Scottish independence campaign gained a lead for the first time this year with two weeks left before the vote. The pound fell the most in 14 months last week, and gauges of future price swings surged after the previous YouGov Plc showed the “No” campaign’s lead was shrinking.
“The referendum is on a knife edge,” said Nick Stamenkovic, an Edinburgh-based fixed-income strategist at broker RIA Capital Markets Ltd. “Markets have been too complacent but are now waking up to the increased risk of Scotland voting for independence.”
The question of whether a go-it-alone Scotland will be able to keep the pound in partnership with the remaining parts of the U.K. has dominated the independence debate with all the major parties in London saying they would oppose it. Scottish First Minister Alex Salmond has argued they would change their view once negotiations began in the event of a vote favoring independence and has said Scotland would refuse to pay its share of the U.K. national debt if they didn’t give in.
A “Yes” vote for independence would prompt a significant increase in the volatility of U.K. assets, while the pound would fall against the euro and particularly the dollar, RIA’s Stamenkovic said today in response to e-mailed questions.
The decline may start when trading resumes in Asia, and also spark losses for “stocks with cross-border flows and trade,” including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, according to Jeremy Stretch, the head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London.
“I would look for sterling to be sold on the open,” he said today. “The risks are even higher” of a vote for independence after the latest polls, he said.
Following months of polls that showed Scotland was unlikely to vote to leave the U.K., the latest surveys have shocked the currency market into action. The pound slid 1.6 percent versus the dollar last week, the largest decline since July 2013. One-month implied volatility, a measure of future price swings used to determine cost of options, surged 23 percent, the most since 2008,after the previous survey was released on Sept. 2.
This weekend’s YouGov Plc survey for the Sunday Times showed “Yes” voters increased to 51 percent, while the “No” side dropped to 49 percent, when undecided respondents were excluded. A separate poll, published by Panelbase, showed the independence campaign still needed to overcome a four-point deficit to triumph. Scotland votes on Sept. 18.
“I expect we will see some further weakening of the pound and also likely to see implied volatility move higher on sterling given the uncertainty that now surrounds not only the referendum result, but also what would happen on a yes vote,” said Simon Smith, chief economist at FXPro Group Ltd. in London. “We’d face more than a year of uncertainty” as politicians worked out details “over the currency, debt burdens and where Scotland stands in international institutions,” he said.
Sentiment was already turning against the pound before the jump in support for Scotland’s independence. It’s tumbled about 5 percent since touching $1.7192 on July 15, which was the strongest level since 2008. Sterling dropped 2 percent in the past month, the worst performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes.
Hedge funds and other large speculators are the least bullish on the pound since January, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers on an advance against the dollar compared with those on a decline was 9,448 contracts last week, down from a net-long position of as much as 56,412 in July that was the biggest since 2007.
A win for Scottish nationalists may have “severe” consequences in the short term and spark a pound selloff, Goldman Sachs Group Inc. economist Kevin Daly said in a Bloomberg TV interview last week. BNP Paribas SA said a “Yes” vote would hurt U.K. government bonds as much as a credit-rating downgrade, while Standard Bank Plc’s head of Group-of-10 strategy Steve Barrow said it could push the pound down toward the mid-$1.50s.
“Given the importance of the vote on Sept. 18, the narrowness of the gap between the two camps and a market that, to date, has largely assumed that a ‘No’ vote was by far the most likely outcome, the danger is that the next few days sees a rush by investors to hedge their risks,” Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, wrote in an e-mailed note. “It therefore looks as if it could prove another dangerous September” for the pound, he said.
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