Pound damaged by polls, Carney is next

<p>The British pound sustains further damage following this weekend’s YouGov poll, revealing pro-independence voters in Scottish taking the lead for the first time – with […]</p>

The British pound sustains further damage following this weekend’s YouGov poll, revealing pro-independence voters in Scottish taking the lead for the first time – with 51% in the “yes” camp ahead of the 18th September vote.

The escalating uncertainty with regards to UK partisan politics, share of North Sea oil and apportioning of UK & Scotland debt has overshadowed robust strong UK fundamentals, which had been lifting the pound since June of last year until two months ago.

At the core of sterling’s latest damage is the sharp decline in market expectations for a Bank of England rate hike. In late July, bond markets were predominantly betting on a February 2015 rate hike. Today, traders expect no tightening before August 2015.

Part of the decline in rate hike odds has emerged from anticipation that the BoE would be forced into its “lender of last resort” role during the uncertainty-filled period following a “yes” vote, and preceding the official independence. Negotiations over the amount of Scottish debt owed to the UK and potential downward revisions in UK GDP could further quell the case for BoE rate hikes.

The other factor dampening expectations of BoE expectations has been the unexpected contraction in BoE (see below).

Known unknown in Westminster

The implications of an independent Scotland on UK politics will be messy at best. Scotland contributes 59 of the 650 members of British parliament, 40 of which are Labour, 11 LibDem, 6 Scottish Nationalist, 1 independent and 1 Conservative.

Considering improved polling figures in Labour and deteriorating figures in LibDems, the 2015 election could see Labour regaining majority in Westminster thanks to those Scottish MPs. But once Scotland becomes its own sovereign in 2016 or 2017, Labour will lose those valuable Scottish MPs, leading to a new parliamentary crash in Labour and a subsequent rebound by the Tories.

Another electoral uncertainty is the EU referendum, promised for 2017, which could well prompt the UK ouf of the EU once Europhile Scottish voters are out.

A “yes” vote will have more questions than answers, or more unknowns, even if they are known or anticipated by political strategists. The implications for the pound could be ugly at best.

Don’t forget the nukes

Aside from the UK losing about a third of its landmass following Scotland’s exit from the Union, the question on UK nuclear weapons remains far from solved. Scotland’s ruling Scottish National party has made its opposition to nuclear weapons clear, insisting that Trident missiles and submarines would have to be removed from the river Clyde once an independent Scotland is born.

The UK’s role as a nuclear power in the midst of increasingly volatile power play between Russia and Europe will be reassessed as no nuclear base other than trident is equipped to service the four nuclear-armed submarines and 200-plus submarine-launched ballistic missiles.

And let’s not forget the fact that Trident missiles are carried by 14 active US submarines and US warheads, which highlights the strategic importance of a nuclear Scotland to the US.

If the ‘new’ UK chooses to build another nuclear site, it may cost at least £5bn and take more than a decade. Would a new UK convince an independent Scotland to continue using trident? And at what cost?

Don’t forget Carney tomorrow

Another possible factor adding to sterling’s losses this week, which is not related to Scotland referendum, is BoE governor, Carney’s, speech at the Trades Union Congress in Liverpool on Tuesday, which will likely reiterate the importance of wage growth.

Combining the currency’s referendum-related sell-off with a fresh reminder from Carney that interest rates ought to remain at their record low levels, selling the bounce in GBP may become traders’ modus operandi until 18th September.

 

GBPUSD Vols Sep 9

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