Yesterday’s confirmation by Scottish First Minister Nicola Sturgeon failed by rain on Sterling’s parade. Sterling finished the European trading session yesterday 0.3% up against the Euro and 0.2% against a strong US Dollar. Whilst the Pound eventually lost the battle against the US Dollar in New York trading hours, it did manage to hold its ground against most other currencies throughout the evening.
The 300-year partnership between Scotland and the United Kingdom was last put to the polls in September 2014 where the Scottish people, by a margin of more than 10% opted to remain a member of the United Kingdom. In fact, in this referendum, only four domestic councils in Scotland voted with the motion to become an independent country.
The people of Scotland account for a little over 8% of the total population of the United Kingdom with a comparable contribution to output on the economic front. The referendum was divisive on both sides of the Scottish border and whilst the direct impact upon the Pound is difficult to measure, you’d be far stretched to find a Sterling trader in the City of London that wouldn’t have listed the referendum as an important risk.
The second attempt at independence that Nicola Sturgeon has pledged to pursue before May 2021 will be another shadow of uncertainty due to hang over the UK political economy in the years to come. The margin between the Scottish Remain and Leave votes was two and a half times larger than the somewhat more infamous Brexit referendum and, without question, doubts surrounding the validity of a ‘do-over’ referendum will be raised.
A more imminent threat to Sterling was partially avoided yesterday evening. The 1922 Committee, a prominent and pervasive group of Eurosceptic MPs within Westminster, was pushing to change Conservative Party laws to undermine an internal party rule that its governing leader cannot face more than one leadership challenge within a 12-month period. This rule amendment has been rejected, however, the Committee is still calling for May to put a deadline on the premiership that she herself has promised to terminate following the successful negotiation of a Brexit deal. To bolster Sterling support further, the fiscal 2018/19 deficit weighed in at only a little over half the size of the previous year, making it the lowest deficit in seventeen years.
The US Dollar continued its triumphant advance. At the open of play yesterday the US Dollar on a trade weighted basis was already trading at a 22-month high. The previous trading session only added to these levels with the Dollar breaking the Euro down through key resistance levels. Meanwhile, several US equity markets also continued their unabating rally.
A dovish interest rate guidance by Bank of Canada’s Governor, Stephen Poloz, reminded markets of the interest rate disparity between the later-cycle United States and the rest of the developed global economy. The Canadian Bank removed a reference to the need for rates to return to a neutral range, stating also that a degree of accommodation must remain in Canadian rates of return. The Loonie weakened alongside these headlines, reinforcing the stronger Dollar.
Amidst broad-based Dollar strength, emerging markets including the Rand and Lira have become increasingly cheap in the past two days. Challenges to Istanbul’s election results in particular have weakened the Lira to levels not seen since last month’s elections.
Discussion and Analysis by Charles Porter
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