Pound plummets on Scottish referendum concerns

The level of complacency in financial markets surrounding the Scottish referendum became extremely evident over the weekend, when it emerged that the latest YouGov poll indicated that the ‘Yes’ vote had eclipsed the detractors.

Pound coins
Source: Bloomberg

The pound has shed some 6% since the highs of close to 1.72 were reached back in July.

If the poll is to be believed, we are now a mere 10 days from what could be a truly historical moment. Alex Salmond has stated that 26 March 2016 will be declared Independence Day should ratification prevail.

Clearly one of the core issues lies with the currency that Scotland would use in the event of independence. Mr Salmond has consistently insisted that the newly independent country will continue to use the pound in a currency union. This has been ruled out by Westminster, however, mainly because it is perceived as unreasonable that taxpayers in Wales and England should support Scotland’s financial sector and public deficit.

There is an option to simply continue to use sterling without the backing of the Bank of England. Bear in mind that having the central bank available as a lender as a last resort is only really pertinent during a significant financial crisis. Mark Carney has pledged to fulfil this role in the transition period, but what would a transition period look like and how long would it actually be expected to last?

The prospect of exiting the pound could trigger bank-runs as savers attempt to protect their deposits. Banks based in Scotland are widely expected to move down south; this significant flow of capital leaving Scotland would clearly do no good to the Scottish economy.

IG is currently offering a 24% chance that GBP/USD will touch 1.5750 by the end of this month. This is clearly not definitive but it does indicate the uncertainty surrounding the public-debt risk.

Borrowing costs would be expected to spike for Scotland and funding might be difficult to obtain in the face of the short term uncertainty regarding Scotland’s status in the EU.

The Scots have the option of reapplying for EU membership and would be expected to adopt the euro as soon as certain criteria are met. The question remains, however; how independent can a country be without its own currency? One could also question how much faith we can put in a single poll. For now, the markets are certainly beginning to price in what was deemed unthinkable.

TNC and Survation polls due out later this week is likely to add to the current volatility, but it may well indicate that the YouGov poll is the outlier.

Presently, IG is offering a binary bet on the Scottish Referendum. While last Friday this indicated a mere 20% of the ‘Yes’ vote being carried, it has now spiked to a 30% chance.

A binary allows you to take a view on whether a specific outcome will or won't occur. If the answer is 'Yes', the binary will settle at 100; if the answer is 'No', the binary will settle at 0. Your profit or loss is the difference between 100 (if the event occurs) or zero (if the event doesn't occur) and the level at which you 'bought' or 'sold'.

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