Currencies Consolidate; Scottish Jitters Past Peak?

The US dollar is mostly softer, but a consolidative tone continues.  The news stream is light.   Participants are still trying to navigate this week while looking at next week’s critical events.. These include the Scottish referendum, FOMC and SNB meetings, Sweden’s election, and the launching of the ECB’s TLTRO facility.  Catalonia’s parliament will decide whether to authorize a referendum (early November), even though Madrid has rejected it.

There seems to be a reasonable chance that the anxiety induced by last weekend’s YouGov poll showing a majority favored Scottish independence is past its peak.  Three developments point to this possibility:  

1.  Other polls show the “no” camp still with a slight majority.  

2.  RBS, Lloyds and Standard Life have reportedly indicated that if  Scotland votes for independence, they will consider moving their headquarters to London.   

3. It does not fully appreciated, but the Scottish National Party confirmed last night (UK Telegraph) that the Northern Isles, like Shetland and Orkney could opt out of an independent Scotland (separate country or remain with the UK) They would retain control over a large part of the North Sea oil and gas that was ostensibly going to fund that new independent Scotland. 

Sterling itself staged a key reversal yesterday, making new lows for the move, down to almost $1.6050 and then rebounding to $1.6230 and closed above the previous day’s high. There has been a little follow through buying that lifted sterling to $1.6255. This represents a new high on the week.  It means that the gap created by the sharply lower opening in Asia on Monday has been entered, but not closed. It extends to last Friday’s low just above $1.6280. 

Recall sterling fell a bit more six cents from the middle of July that the end of  August.  It fell roughly another six cents since.  The first half of the move was seemed to have been about technical profit-taking, softer economic data, and “temporal inconsistencies” with forward guidance.  The second half of the move was sparked by the surging US dollar and Scottish anxieties. The $16.280 area also corresponds to a retracement objective of the last leg down.  Above there, there is potential toward $1.6350. Ideas that a “yes” vote would hit the UK economy and push out the first rate hike means that a “no” vote would see the UK debt market come under stronger pressure.