LONDON: Sterling bounced from a 10-month low against the dollar and rose against the euro on Thursday, drawing some comfort from a poll that showed those planning to vote for Scotland to stay part of the United Kingdom were gaining the upper hand.
The poll, carried out by Survation on behalf of the Daily Record newspaper, showed 47 percent intended to vote for a split and 53 percent intend to vote against. The figures excluded 10 percent of people who were undecided.
In the past few days, sterling has come under sustained pressure after polls suggested that the pro-independence camp was gaining momentum, having trailed for months. The referendum is due to be held on Sept. 18.
Sterling rose to $1.6265, recovering from $1.6051 - its lowest since Nov. 15 - struck on Wednesday. It bounced in late trade on Wednesday after the Survation survey was released, but was still 5.7 percent lower than a high of $1.7192 seen in mid-July.
The euro eased 0.2 percent to 79.535 pence, well below a three-month high of 80.66 pence struck on Wednesday.
"Sterling remains susceptible to the referendum and unless sterling/ dollar breaks past $1.63, it will remain a sell on rallies," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
He added that unless polls showed the "No" votes were gaining more ground, sterling would be subject to volatility.
Uncertainty was driving anxious investors, including hedge funds, to seek protection against sharp fluctuations in the pound, traders said. Also, with a number of unverified polls likely to be released in the lead up to the referendum, sentiment towards sterling was likely to remain skittish.
The cost of hedging for the next week, which covers the Scottish referendum, jumped to 13-month highs on Thursday.
One-week sterling/dollar implied volatility rose to a high of 11.725 percent, according to Reuters data, its highest since July 2013. One-week options expire on Sept. 18.
"It is very rational that the one-week implied vols are elevated as international investors are waking up to all the issues and the implications from the vote," added CIBC's Stretch.
HAGGLING OVER THE POUND
Many investors fear that a Scottish split would leave Britain saddled with higher debt and a smaller domestic market that could hurt future investments. More debt could lead to a possible downgrade by rating agencies and outflows from Britain.
The pound is centre-stage in the heated debate over Scotland. The pro-independence leader, Scottish First Minister Alex Salmond, says Scotland will share the pound. Westminster has ruled that out, leading to uncertainty about the currency.
Wading into the controversy, Bank of England Governor Mark Carney said earlier this week that a currency union between an independent Scotland and the rest of the UK would be "incompatible with sovereignty".
In any case, a "Yes" vote is likely to see further weakness in sterling and UK assets.
Analysts at Bank of New York said when previous crises have hit the pound - the mid-1970s, when inflation and a high budget deficit took its toll, 1992 when Britain was forced to abandon the European exchange rate mechanism and 2008, when the global financial crisis began - sterling lost an average 32 percent against the dollar.
"On the current evidence, the outcome of next Thursday's referendum is too close to call," they said in a note. "Given this, having an understanding ahead of the vote of positioning, the potential risks and sterling's history of large scale moves is of value."
Comments
Comments are closed for this article.