8th September 2014
Brenda Kelly, chief market strategist at IG Group, comments on the upcoming Scottish referendum’s impact on the pound…
The level of complacency in financial markets surrounding the Scottish referendum became evident in the extreme over the weekend when it emerged that the latest YouGov poll indicated that the ‘Yes’ vote had eclipsed the detractors.
The effect on sterling was sharp and dramatic with the pound sinking to levels last seen in November last year against the dollar. Even this morning, the downside dominates and with uncertainty weighing, it would be of no surprise to see additional losses for the pound.
The pound has now shed some 6% since the highs of close to 1.72 reached back in July.
If the poll is to be believed, we are now a mere 10 days from what could be a truly historical moment. Mr Salmond has stated that March 26 2016 will be declared Independence Day should ratification prevail.
Clearly one of the core issues lies with the currency that Scotland would use in the event of independence. Alex Salmond has constantly insisted that the newly independent country will continue to use the pound in a currency union. This has been ruled out by Westminster, mainly because it is perceived as unreasonable that taxpayers in Wales and England should support Scotland’s financial sector and public deficit.
There is an option to simply continue to use sterling without the backing of the Bank of England. Bear in mind that having the central bank available as a lender of last resort is only really pertinent during a significant financial crisis. Mark Carney has pledged to fulfil this role in the transition period. But what would a transition period look like and how long would it actually be expected to last?
The prospect of exiting the pound could trigger bank runs as savers attempt to protect their deposits. Banks based in Scotland are widely expected to move down south and thus this significant flow of capital leaving Scotland would do no good to the Scottish economy.
IG is currently offering a 24% chance that GBPUSD will touch 1.5750 by the end of this month. This is clearly not definitive but it does indicate the uncertainly surrounding the public debt risk.
Borrowing costs would be expected to spike for Scotland and funding might be difficult to obtain in the face of the short term uncertainty regarding Scotland’s status in the EU.
The Scots have the option of reapplying for EU membership and would be expected to adopt the euro as soon as certain criteria are met. The question remains however, how independent can a company be without its own currency.
One could also question how much store we can put in a single poll. For now, the markets are certainly beginning to price in what was deemed unthinkable.
TNC and Survation polls due out later this week will likely only add to the current volatility but may well indicate that the YouGov poll is the outlier.