Is Cable Setting Up For a Massive Short Covering Pop?

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Market Drivers for September 08 2014

Cable crushed as Scotland Yes vote leads
Chinese Trade better than forecast

Nikkei 0.23% Europe .31%

Oil $92/bbl

Gold $1269/oz.

Europe and Asia:

AUD ANZ Job Adverts 1.5% vs. 0.5%

CNY Trade Balance 49.8B vs. 40.8B

EUR GE Trade Balance 22.2B vs. 17.3B

EUR Sentix -9.8 vs. 3.2

North America:

CAD Building Permits 8:30 AM

Fears of Scottish secession from UK completely dominated trade in the currency market
on the first day of the week with cable gapping lower and falling more than 200 points to within a whisker of the 1.6100 level.

The latest polling data from Scotland shows that the Yes vote has pulled ahead setting up the prospect of Scotland pulling out of the United Kingdom. While the situation remains highly fluid and polls at this point could be notoriously inaccurate, the markets have wasted no time in dumping pounds as the uncertainty surrounding the issue has spooked investors.

The issue of national sovereignty can be highly emotional and as several reporters have pointed out the Yes vote has become a movement rather than a campaign. Yet whether the voters will actually pull the trigger in the privacy of the booth remains to be seen. Many analysts have pointed the Parti Quebecois vote in Canada as an example of another secession movement that failed in the voting booth even though polls leading up to the event suggested that the Yes side would win.

If the Scots go through with the vote for independence the uncertainty and commotion over the breakup is sure to create further turbulence in the UK economy. Not only will it most likely delay the Parliamentary election scheduled for May, but it will certainly delay any rate hike action by the BoE as UK credit markets will no doubt require ample liquidity in order to adjust to the new political reality.

On the other hand, if the Yes vote fails cable is setting up for a massive short covering rally. The underlying activity in the UK economy remains relatively robust. The sharp declines in the currency have likely boosted manufacturing competitiveness and the prospect of a rate hike will be back on the agenda with two MPC members already signaling that they are ready to raise rates now.

In the meantime if the polls continue to signal a victory for Yes vote, cable will remain under pressure and the pair could tumble all the way to 1.6000 level as investors liquidate positions ahead of the event. Thus, the only certainty for the market right now is that volatility in sterling will continue to rise as we move closer to the September 18th vote.

Boris Schlossberg
Managing Director

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