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Scottish independence: City shows confidence in No vote as pound bounces back Scottish independence: Pound bounces back heavily after YouGov gives final prediction to No campaign
(about 2 hours later)
The pound hit a two-year high against the euro today as the City rushed to gamble on a No result while Scots voted on whether they wanted to stay part of the UK. The pound leaped in the minutes after the YouGov post-election "final prediction" suggested a 54 per cent victory for the No vote in the Scottish referendum.
In the past two weeks, most polls about the vote, which closes at 10pm, have indicated that those supporting independence have been slightly behind those wanting to keep the union, but given the high number of people who are still undecided, it has remained too close to call. Traders saw sterling shoot up as the markets reacted with relief to weeks of uncertainty about the future of the UK economy. Although opinions among investors and economists were mixed about the long term impact of a secession vote, the view was almost unanimous that the uncertainty in the shorter term would be extremely unsettling.
In recent weeks, there have been warnings from major banks that a Yes vote could lead to the collapse of the pound. Many investors had already begun taking increasingly large bets on a No, particularly in the currency markets, where the pound has been gaining today.
"The pound's reaction clearly suggests investors are convinced that the Scots will vote to stay in the union," Fawad Razaqzada, technical analyst at traders Forex.com, told AFP. Justin Pugsley, a currency analyst at brokers MahiFX said: “The pound is rising strongly now. If we do get a 'No' tomorrow, I’m sure we’ll get something of a relief rally. It will be a real relief for all investors, I think. Make no doubt, though, if this poll proves wrong and we get a 'Yes', the pound will really plunge.”
"To what degree they will vote against being independent will determine the future direction of the pound. If it is a very tight No then we could see the pound lose some ground once the initial euphoria fades." Hedge funds, which always tend to have the biggest appetite for risky bets, piled in particularly heavily throughout the afternoon, with global data showing they have more bets on a sterling rise now than at any time since July – before the huge momentum in the Yes campaign of recent weeks.
"On the other hand, a decisive No could send sterling skyrocketing. Needless to say, a Yes vote would almost certainly result in a massive drop." However, at IG Index, trader David Hale said: “The pound has risen since the YouGov poll but I have to say more of our clients have seen that rally and are selling into it. In other words, they're betting YouGov is wrong.”
Earlier this month it emerged that major global investors have been pulling billions out of the British economy due to fears that Scotland could vote for independence. Sterling had fallen as low as $1.6052 on 10 September after a shock YouGov poll put the nationalists in front for the first tim. But it bounced back as Westminster’s leaders upped the political rhetoric. This evening it had risen to just shy of $1.64 before it shot up to $1.6444 in the wake of the prediction. That marked a gain on the day of more than half a cent.
Nobel Prize-winning economist Paul Krugman also warned that a vote for Scottish independence would be catastrophic for the country. “The risks of going it alone are huge,” Mr Krugman warned in his New York Times column on 7 September. “You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.” Commerzbank analysts have predicted the pound would rise to $1.67 by the end of the year in the event of a No, as investors put their money back into the UK in recognition of its status as one of the fastest growing western economies.
International investors eyeing the situation have also expressed concern about other similar political situations, most notably the Catalans’ demands for independence in Spain. While share prices and UK Government bonds, known as gilts, will react when trading begins in London at 8am, through the night it will be the pound-dollar market that demonstrates the sentiment of global investors.
Today, sterling rose to $1.6388, well above the 10-month low of $1.6051 it struck last week. It has bounced back from these lows as investors trimmed bets against it after most polls in Scotland showed those in support of the Union were ahead. Usually currencies trade 24 hours a day, switching from London to New York to Asia. But due to the enormous concerns of investors about the Scottish referendum, many London banks and hedge funds have ordered their currency traders in tonight and early tomorrow, commandeering extra staff.
The pound also gained against the euro, which fell to 78.53p, its lowest since August 2012.
The common currency was also hit after the European Central Bank handed out a below-forecast €82.6 billion (£65.19 billion) in its first offering of four-year loans. Traders said the lower take-up would keep pressure on the ECB to opt for quantitative easing.
"It seems people are growing reasonably confident of a No vote in Scotland," said Ian Gunner, portfolio manager at Altana Hard Currency Fund.
"The risks are if it goes the other way, and that is one of the reason why overnight implied vols are still trading higher."