July 21, 2014 / 3:26 PM / 6 years ago

Investors start pricing in Scotland vote risk for sterling

LONDON (Reuters) - Currency investors began on Monday to show a glimmer of concern over the risks a surprise from Scotland’s September vote on independence might pose to sterling, having appeared complacent over the issue so far.

The national flag of Scotland (C) flies amongst other flags in a street in East Belfast July 5, 2014. REUTERS/Cathal McNaughton

Scottish independence has been at best a slight risk for most money managers, with opinion polls still showing more than 50 percent of Scots want to remain part of the UK - far more than the third who want independence.

In fact, the pound has gained 3.5 percent against the dollar GBP=D4 in the past six months to a shade below $1.72, its highest in nearly six years, as investors focus on the prospect of higher UK interest rates given a robust economic recovery.

But that appears to be changing. Some investors started to buy options on Monday that allow them to hedge against the possibility of a Scottish vote for independence. This trend is likely to pick up in coming weeks, analysts said.

Two-month implied volatility GBP2MO=, which captures the Sept. 18 vote and the results and shows how sharp swings in a currency is likely to be, rose to around 5.2 percent from below 5 percent on Friday and 4.6 percent just a week ago.

“There is hedging against a surprise vote in the Scottish referendum and the two-month implied vols are suggesting that,” said Peter Kinsella, currency strategist at Commerzbank. “Hedging against an outside chance of a split is pretty cheap.”

Sterling two-month risk reversals GBP2MRR=ICAP, which gauge demand for options on a currency rising or falling, also showed a greater bias for sterling weakness than did their three-month equivalents. GBP3MRR=ICAP


Uncertainties include which currency an independent Scotland would use, membership of the European Union, sharing of North Sea oil revenues and whether the Scottish fund industry would move south, they said.

A number of banks have published reports in the past few weeks which highlight a prolonged period of sterling weakness if the Scots voted for independence.

BNP Paribas analysts said that whether or not Scotland voted for independence, the referendum was likely to deliver a shock to sterling.

“Even a ‘no’ vote will herald a new era, one that could spell uncertainty for sterling,” they said. “A ‘no’ vote on September 18 will not be a continuation of the status quo in our view, given the push for devolution by the Scottish National Party.”

The SNP is leading the campaign for independence.

Morgan Stanley analysts said that a “yes” vote could cause sterling to slip by up to 10 percent on a trade-weighted basis =GBP, retracing its gains over the past year.

“We have a morning trading meeting every day and for the first time today one of the spot traders said: ‘What do you think about the Scottish referendum?’” said Adam Myers, a currency strategist at Credit Agricole.

He said the market consensus appeared to be that the economic ramifications of a “yes” or “no” vote were quite evenly balanced.


Traders will watch on Wednesday the minutes from the latest Bank of England policy meeting for any signs of when a first interest rate hike in seven years might happen. The market is pricing in a slight chance that it will come in November GBPOIS=ICAP.

“If those minutes do disappoint and it looks like MPC board members are willing to stay on hold, then we could test $1.70 by the end of this week,” he said.

Sterling was down 0.2 percent at $1.7060, having hit a near six-year high of $1.7192 GBP=D4 last week. The pound fell against the euro, with the single currency up 0.1 percent at 79.28 pence EURGBP=D4.

“Tailwinds from BoE hikes may not be enough to offset growing downside risks. Investor concerns about the Scottish referendum in September, general elections next May and a potential ... “Brexit” (Britain leaving the European Union) could ... fuel FX implied volatility,” analysts from Citi said.

Editing by Tom Heneghan

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