Pound Gaps Lower on Referendum Fears

A weekend poll showed pro-independence voters in Scotland taking the lead and the pound has tumbled in response. Cable gapped nearly 150 pips lower in early trading down to 1.6167. We also explain why it may not be time to worry about the crowded USD trade … yet.

A single YouGov poll put 'Yes' voters at 51% ahead of the Sept 18 vote. We reiterate that polls will overshadow UK fundamentals ahead of the vote. Other polls still show the pro-Britain side ahead but what's clear is that a comfortable lead has turned into a close race.

Ultimately, a Great Britain split may not be negative because Scotland will likely continue to use the pound. But one of the oldest market axioms is that uncertainty breeds contempt and a "Yes" vote would bring uncertainty in spades. Separation would be a messy and likely emotional affair at a sensitive time in the UK recovery.

Technically, the fall in cable has been dramatic since the first polls showed narrowing polls on Aug 31. The pair has fallen 430 pips in a week. The week-opening gap blew through the Feb 2014 low of 1.6250 and that may act as resistance if cable bounces when cooler heads prevail. The big figure is now in focus on the downside because it's also the 50% retracement of the 2013-14 rally. That's followed by the Nov 2013 low of 1.5851.

Other early moves put AUD and NZD 10-20 pips lower; the yen is also slightly lower. Other weekend developments questioned the validity of the Ukrainian ceasefire, especially late-breaking reports of shelling near Donetsk.

Early-week economic data focuses on Japan. Up first, at 2350 GMT, it's trade balance for July, expected at ¥444.2B. Final Q2 GDP is due at the same time.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -162K vs -151K prior JPY -118K vs -103K prior GBP +10K vs +15.5K prior AUD +49K vs +42K prior CAD +13K vs +6K prior CHF -13K vs -13K prior NZD +10K vs +12K prior

The rush into EUR and JPY shorts continues and will soon be followed by cable shorts. The overall net USD long is stretched but the fundamentals are so divergent between the US and its major rivals that unless the economic story changes, any USD selling will be temporary.