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Sterling skids to near 10-month low on Scotland worries
Sterling weakened to its lowest in nearly 10 months on Monday amid worries about political uncertainty after an opinion poll showed supporters of Scottish independence from Britain taking the lead for the first time since the referendum campaign began.
With less than two weeks to go before the vote, a YouGov survey for the Sunday Times newspaper put the "Yes" to independence campaign at 51 percent against the "no" camp at 49 percent.
Sterling fell nearly 1 percent to around $1.6165, reaching lows not seen since Nov. 26. It last traded at $1.6222, down 0.7 percent on the day. Against the euro, the pound touched its lowest level in nearly three weeks at 80.17 pence per euro .
"I think the message here is that the market really hadn't priced in the possibility of a 'yes' vote, so therefore we will probably see some uncertainty, maybe some volatility," said Jesper Bargmann, head of trading for Nordea Bank in Singapore.
Sterling could come under further pressure ahead of the Sept. 18 referendum on Scottish independence, especially since the dollar remains firm, Bargmann said.
Against the yen, sterling touched a three-month low at 169.68 yen, before recovering a bit of ground to 170.41 yen.
"A vote for independence only marks the opening chapter in uncertainty over issues ranging from the timelines for political and economic independence, resultant institutional frameworks, lender of last resort for Scotland, the division of assets and liabilities, fiscal impact and policies, and what currency choices Scotland will have available and choose," analysts at Barclays wrote in a note to clients.
"As a result, realized volatility in GBP, with a downside bias, likely will increase for an extended period."
On technical charts, sterling has key long-term support at around $1.6000 to $1.6100, with both the 100-week and 200-week moving averages now in that area, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.
The tumble in the pound helped lend support to the dollar in the wake of a disappointing payrolls report on Friday.
U.S. employers hired the fewest number of workers in eight months in August. Non-farm payrolls increased 142,000, well below the 206,000 forecast. The jobless rate edged down to 6.1 percent as more Americans gave up the hunt for jobs.
The report prompted benchmark U.S. Treasury yields to fall from one-month highs and undermined the dollar. Against the yen, the dollar last traded at around 105.06 yen, staying below a six-year high of 105.71 yen touched on Friday.
The euro, which has come under pressure after fresh policy action from the European Central Bank last Thursday, steadied against the greenback. It traded at $1.2950, just off a 14-month low of $1.2920 set last week.
The Australian dollar eased 0.1 percent to $0.9369, having backed off from Friday's high of $0.9403, its highest level since late July.
The Aussie dollar showed limited reaction after data showed that China's exports rose more than forecast in August while imports unexpectedly fell, pushing the trade surplus to a record high for the second consecutive month.
The Aussie has shown resilience despite recent U.S. dollar strength and a sharp decline in prices of iron ore, Australia's top export earner, in large part due to renewed carry trade demand. Investors are borrowing at low rates in euros and yen to buy higher-yielding Aussie assets.
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Halifax U.K. HPI rises 0.1% in August
House prices in the U.K. rose less than expected in August, fuelling concerns over the health of the housing market, industry data showed on Monday.
In a report, the Halifax Bank of Scotland said its House Price Index inched up by a seasonally adjusted 0.1% last month, below expectations for a 0.2% increase.
U.K. house prices rose by 1.2% in July, whose figure was revised down from a previously reported gain of 1.4%.
House prices in the three months to August were 9.7% higher than in the same three months a year earlier, below forecasts for a 9.9% increase and slowing from a gain of 10.2% in July.
GBP/USD was trading at 1.6170 following the release of the data, while EUR/GBP was at 0.8005.
Meanwhile, European stock markets were lower after the open. London’s FTSE 100 dipped 0.4%, the DJ Euro Stoxx 50 shed 0.2%, France’s CAC 40 fell 0.2%, while Germany's DAX inched down 0.2%.
U.K. Races to Grant Powers to Scots to Blunt Independence
The U.K. government raced to put together a package of more powers for Scotland in a bid to persuade voters to reject independence in favor of the promise of more autonomy within the union.
Shocked into action by a poll showing the Yes campaign ahead for the first time this year just 10 days before a referendum on independence, all three main U.K. parties said they would cede more control over the levers of policy making to the Scottish Parliament in Edinburgh. Scots nationalist leader Alex Salmond dismissed the move yesterday as a “bribe” that wouldn’t sway voters in the Sept. 18 ballot.
The rush to hand over power reflects mounting political and investor concern that the splintering of the U.K. after more than three centuries has moved into the realms of reality. Having attacked the Yes camp’s assertions on an independent Scotland’s currency, economic viability and European Union membership, polls suggest the Better Together campaign has still failed to arrest the drift toward independence.
“We had expected the polls to tighten in the final few weeks of the campaign,” said Rob Wood, chief U.K. economist at Berenberg Bank in London, adding that he still projects a No vote. “But the recent movements have been further and faster than we had anticipated. It raises the risks of the U.K. breaking up.”
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U.K. manufacturing production rises 0.3% in July
Manufacturing production in the U.K. rose in line with market expectations in July, while industrial output topped forecasts, official data showed on Tuesday.
In a report, the U.K. Office for National Statistics said that manufacturing production inched up by a seasonally adjusted 0.3% in July, meeting expectations. Manufacturing production in June rose by 0.3%.
On an annualized basis, manufacturing production rose at rate of 2.2% in July, in line with expectations, after rising at a rate of 1.9% in the preceding month.
The report also showed that industrial production rose by a seasonally adjusted 1.7% in July, compared to expectations for a 1.3% gain, after increasing 1.2% in June.
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Carney signals rate hike only in the spring – GBP/USD loses gains
Carney only temporarily lifted the pound. While he began by saying that rates are set to rise, he followed up with a timing of this hike, and it seems to be further away than earlier perceived. At least Carney is giving us some forward guidance.
GBP/USD is back down to 1.6110 after trading above 1.6150 when the speech was initially released. Nevertheless, cable is still off the lows seen earlier in the day.
Here is the key quote:
If interest rates were to follow the path expected by markets — that is, beginning to increase by the spring and thereafter rising very gradually
Rate hike expectations have moved back and forth, reaching November and then being pushed back to February.
The spring is March at the earliest, but also April and May are months when flowers blossom and rates may rise. This seems to be a more dovish approach than earlier thought.
Carney adds to the worries coming north of Hadrian’s wall: the worries about Scottish independence are weighing on the pound.
Is 1.60 the next target?
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Carney is the same like the rest of them. Doing things only when it is way to late
How Scottish Independence Would Affect Financial Markets
With just nine days to go before the vote on Scottish independence, major global investors are withdrawing billions of pounds from the UK economy over fears that Scotland may vote “yes” to becoming an independent country.
The capital outflow has been as high as 12 billion pounds ($20 billion) from the country so far this year, according to figures from Societe Generale SA (PARIS:SOGN), which has raised concerns over how international markets could react once Scotland votes on Sept. 18.
When Scotland goes to the polls its population will answer "yes" or "no" to one simple question: "Should Scotland Be an Independent Country?" Current polls are trending towards “yes” after more than two years of "no" dominance, but now the vote balances, according to many observers, on uncertainty about what arrangement Scotland would have regarding its currency -- whether it would keep the British pound, adopt the euro or go a third route.
“It would still be a cold shower for many investors if Scotland voted for independence,” said London-based UBS economist Reinhard Cluse. “I think the biggest issue is what happens to investors' risk appetite, and I think a yes could lead to pull back in that appetite and put pressure on equity,” or drive down stock markets.
If Scotland chooses to abandon its sovereign debt -- the portion of the British public debt it’s expected to take with it if it becomes independent -- it will fall to the remaining parts of the U.K. to service it. That could “arguably increase the uncertainty of the credit quality of the gilts market in the U.K.,” said Cluse. In other words, bonds issued by the British government or gilts, which considered low-risk, would be seen as more risky, because the government issuing them would be more indebted. This, according to a Sept. 8 UBS report that Cluse co-wrote, is “a costless threat at the moment, because Scotland has no bonds.”
During live debates between the Alex Salmond, leader of the Scottish Nationalist Party, and Alistair Darling, leader of the pro-U.K. campaign, the issue of currency has been one that has deeply divided voters, with the unionists claiming Scotland couldn't use the pound and the separatists saying it can. After months of speculation Darling admitted that Scotland couldn't be stopped from keeping the pound, but it would have to accept whatever interest rate the Bank of England decides to set. The dangers of having a fiscal union without the political element were outlined by Nobel Prize-winning economist Paul Krugman in a New York Times opinion piece on Sunday, in which he said, “If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.”
The effect on the pound has been clearly visible. The British currency fell 1.3 percent against the dollar on Monday to $1.611 for a pound, and also fell 1 percent against the euro to 1.2488 euros, a 10-month low.
An independent Scotland may also become a large producer of the world's most indispensable commodity, oil.
Should Scotland wrestle control of oil produced in the North Sea from the U.K., its North Sea oil reserves would be huge. At current prices they are estimated to be worth between 60 billion pounds ($90 billion) and 1.5 trillion pounds ($2.2 trillion).
But according to Cluse, while Scottish independence "would be quite a big event on a global scale" for the oil market, it would not move oil prices as much as "what’s happening in Russia, Ukraine and Middle East." But the overall issue, according to the UBS report, is far more nuanced that simply the country voting “yes” or “no.” In the event of a narrow “no” vote, claims the report, the markets could react in the same way as a “yes,” because of the likelihood that Scotland will be granted wider powers from London and that there may be a repeat referendum.
“This might be years away,” said Cluse. “But the point is, this is not just about “yes” or “no.” The outcome of a narrow “no” will not end the discussion, but actually start a much wider discussion on many things that could continue to impact the market for years to come.”
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GAM Betting Against U.K. Bonds Amid Scotland Vote
It makes sense to bet against U.K. bonds as voters in Scotland ponder independence, according to Tim Haywood, an investment director at GAM Holding AG (GAM)’s asset-management unit.
The combination of next week’s referendum and a general election next year may force the Bank of England to delay policy changes for as long as one year, Haywood told reporters today an event in New York. He said that would lead to a larger difference between short-term interest rates, which are guided by a benchmark set by the central bank, and longer-term yields, which generally reflect inflation expectations.
“The Bank of England may be well and truly behind the curve,” said Haywood, who is based in London and whose company oversees about $140 billion of assets. He said his team is also betting against the U.K.’s currency.
The pound dropped to the weakest level in more than nine months against the dollar and government bonds declined as investors consider the implications of the union’s possible unraveling.
Bank of England Governor Mark Carney told delegates at the annual conference of the Trades Union Congress in Liverpool, England, today that they should prepare for borrowing costs to rise next year. Otherwise, he said, the central bank’s aim of keeping inflation at 2 percent will be at risk.
Thirty-eight percent of respondents said they’d vote Yes to Scottish independence in the Sept. 18 ballot, up from 32 percent, a monthly poll by TNS found. That compares with 39 percent who said they favored the status quo, down from 45 percent. The No campaign’s lead of one percentage point is down from 13 points last month, TNS said. Another 23 percent of respondents said they have yet to make up their minds.
The swing in recent polling may “inspire people who were not going to vote to get up and vote,” Haywood said.
GAM, which also projects that U.S. and German yields will rise to reflect their improving economies, is short the U.K. bond market through gilt futures and swaps, he said. A short position is a bet that an asset will decline in value.
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Pound Climbs on Signal Scots May Vote to Stay in U.K.
The pound jumped from the lowest level against the dollar in 10 months after an opinion poll showed fading support for Scotland’s bid for independence from the U.K.
The dollar reached the strongest against the yen since 2008 and rose versus the euro as traders raised bets the Federal Reserve will increase interest rates in mid-2015. Switzerland’s franc slumped to a one-year low against the dollar and dropped versus the euro after the Wall Street Journal reported negative interest rates remain an option for the Swiss National Bank. The ruble dropped as European officials considered sanctions against Russia.
“We’ll continue to see this back-and-forth in the pound based on whatever poll that’s coming out,” Ken Wills, currency strategist at CanadianForex Ltd. in Toronto, said in a phone interview. “An awful lot of events are also going on at the same time. We’re seeing a normalization in volatility.”
Sterling strengthened 0.7 percent to $1.6211 at 5 p.m. in New York. It fell earlier to $1.6052, the weakest since Nov. 15. The currency lost 3 percent this month through yesterday, the most of any of its 16 major peers.
The greenback rose 0.6 percent to 106.86 yen and reached 106.89, the highest since September 2008. It advanced 0.2 percent to $1.2917 per euro after touching $1.2860 yesterday, the strongest since July 2013. The shared currency gained 0.5 percent to 138.03 yen.
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Holding GBP positions these days will not be smart. Each new poll will change it - better then a roller coaster