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  • Adding in on our bullish GBP/USD (via the etf FXB) position as we believe that the Scots vote down independence when the country votes next Thursday, September 18th
  • We expect the currency to retrace its move alongside strong fundamentals underpinning the cross

We did not see the Scottish Independence threat manifesting like it has. In fact, UK high frequency data has shown a strong positive divergence over continental Europe in recent weeks, which we believe is supportive to our thesis. 

That said, the GBP/USD (etf FXB) has clearly been battered down:  -5.8% since a high on 7/2; -2.6% month-to-date; and over -1% intraday (the weakest levels since late November 2013). It has moved in step over the last two weeks as the spread between “No” versus “”Yes” votes for Scottish independence has come in considerably to the Yes side - to a 2% advantage according to a YouGov poll released over the weekend.

Buy Pound Sterling on Scottish Independence NOT Happening - z. yougovb

Buy Pound Sterling on Scottish Independence NOT Happening - z. gbp anno

Ultimately we think the myriad of economic risks presented by a "Yes" vote (listed below) will outweigh the more popular sentiment shift over recent weeks – which has been driven alongside a campaign by Scotland’s First Minister Alex Salmond to appease fears presented by secession – however be prepared for a close vote.  Also note, betting markets are not buying into Scottish independence, with No = 71%; Yes = 29%.

Secession Risks:

  • Currency –  UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle

While Salmond’s "Yes" campaign has been driven on the promise that an independent vote will allow the country to capitalize on oil wealth and enable the government to improve its system of social welfare, we size up his campaign rhetoric as over-promising and under-delivering. 

The myriad of economic risks (presented above) may in fact leave the average citizen at a disadvantage as the economy grows at a slower rate with less jobs. Add on the uncertainty around the promise of “oil wealth”:  while more than 80% of Britain’s oil lies in reserves with Scotland’s maritime borders, how the reserves would be divided is uncertain, with no certainty that an independent Scotland would get the long end of the stick.

Matthew Hedrick