Kingdom Stays United, Sterling Rally Stalls $1.6525, Yen Slumps

The results are not final or official yet, but it is clear that Scotland voted to remain part of the United Kingdom in a vote that was not as close as the opinion polls suggested. The “wisdom of crowd” type of information from the formal and informal markets had anticipated this outcome.   Sterling poking through $1.6400 in North America yesterday, sterling advanced to $1.6525 in Asia before pulling back a cent.    Recall sterling bottomed on September 10 near $1.6050.  The cap we identified between $1.6500 and $1.6600 remains intact. 

In a firm US dollar environment, the sterling opportunity may reside more on the crosses than against the greenback.  With the referendum out of the way, there is no reason not to expect the BOE to raise rates early next year, still likely before the Federal Reserve.  The political uncertainty shrouding the referendum overshadowed, to some extent, the favorable macro economic considerations.  The divergence theme, with the US and UK beginning to normalize monetary policy while the ECB and Bank of Japan are still with a heavy foot on monetary accommodation, is a key feature of the investment climate.  

Sterling has exploded over the few sessions against the yen, for example.  On Sept 8, it has broken down to JPY169.35.  Today, it moved above JPY180 for the first time since 2008.    The next target is near JPY184.   The euro is heading for the July 2012 low near GBP0.7755.  Recall, the euro briefly poked through GBP0.8000 on Sept 16, and today neared GBP0.7800. 

There had been some concerns that a small victory for the unionists would spur concerns that this will be a recurring issue as some drew parallels with the Quebec experience.  While we recognize this as a possibility, we suggest this is not an immediate issue.  The victory appears to be solid, and the terms of the referendum were as favorable for the nationalists as could be imagined (16-year old voters, non-residents can’t vote and a simple majority was needed).    The main political issue now is not whether Scotland stays in the UK, but whether the UK stays part of the EU.  Cameron faces a backbencher revolt over the issue and a UKIP that enjoys some momentum.