Cable Eyes 1.6500 on Fears of Scottish Independence

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Market Drivers for September 02 2014

UK PMI Construction best in 7 months but jitter over Scotland push pound lower

RBA Statement basically unchnaged

Nikkei 1.24% Europe 0.73%

Oil $95/bbl

Gold $1278/oz.

Europe and Asia:

AUD Building Approvals 2.5% vs. 1.7%

JPY Average Cash Earnings 2.6% vs. 0.9%

CHF GDP 0.0% vs. 0.5%

GBP UK Construction PMI 64 vs. 61.5

North America:

USD ISM Manufacturing 10:00 AM

USD Economic Optimism 10:00

Cable was badly beaten in morning London dealing today as concerns over the Scottish independence vote trumped the better than expected economic data from the construction sector.

With only a few weeks to go before the Scottish referendum vote scheduled for September 18th, the latest YouGov poll has revealed that the gap between the No and the Yes vote has narrowed markedly. The No vote still leads at 53% to 47% for the Yes vote, but that represents a narrowing of 8 points from the 14 point lead just a month ago.

Although most analysts still expect Scotland to remain within the UK, the latest uptick in the Yes vote for independence has spooked the markets which did not expect the vote to be this close. A move to independence would introduce massive uncertainty into the UK economy including the issue of what currency Scotland may use.

Scotland represents about 8.2% of UK population and enjoys GDP per capita either on par with UK or higher depending on whether you count the oil and gas revenues. There are wide ranging estimates as to how much oil is left in the North Sea reserves with upper forecasts at 1.5 Trillion GBP and lower estimates at 120 Billion GBP. The economic picture is complicated further by the fact that Scottish banks hold assets of 1200% of GDP – a figure higher than Cyprus – and are therefore highly vulnerable to a depositor run in case of any crisis.

The sudden surge in the Yes vote has clearly unnerved the markets and selling in cable accelerated as the morning wore on with the pair trading to a low of 1.6520. Currency markets are notoriously sensitive to political risk and if the polling suggests that the Yes vote is approaching the margin of error then cable could see a further sell off through the key 1.6500 support level.

Elsewhere, the RBA rate decision essentially reaffirmed the banks recent position noting that the AUD remains above most estimates of its fundamental value and that it is offering less assistance to the economy than it otherwise might. But at the same time the central bank offered no suggestion that it may intervene to lower the exchange rate and a result the Aussie traded largely unchanged for most of the night before slipping below the 9300 as part of the broad dollar rally.

The dollar was well bid across the board rising to within a whisker of the the 105.00 barrier in USD/JPY and pushing EUR/USD to within 10 pips of the 1.3100 level. The market continues to like the US relative strength story and if today’s ISM Manufacturing data proves to be supportive, 105.00 in USD/JPY 1.6500 in GBP/USD and 1.3100 in EUR/USD could all fall before the day’s end.

Boris Schlossberg
Managing Director

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