Friday, September 19, 2014

Buy the rumor sell the pound

By Andrew Wilkinson

The performance of the British pound(CME:BPZ4) the morning after a decisive No vote amongst Scottish voters reminds of us an old television game show. The pound spiked above $1.6500 as the first ballot box was counted, revealing clear lack of appetite from Scots to quit the Union. Yet despite the fact the issue has been settled overnight the British currency fell. It had been widely predicted that the pound would suffer badly had the Yes vote won. On Friday morning the pound is now lower than Thursday’s close, buying just $1.6333. One can almost hear the TV quiz host asking his contestants why they think the pound is lower:

Is it a) because the poll was so close there will likely be another referendum on the issue sooner than we think?

Is it b) because the pound never really fell very hard before the poll in the first place?

Or is it c) – Something else?

For sure the close shave for British Prime Minister David Cameron is likely to open up questions about the future of national politics. The turnout for Thursday’s poll at around 85% was tremendous. But another poll anytime soon seems an unlikely reason to dump the pound on Friday. And the pound had slumped five-cents against the dollar once the YouGov poll projected a possible Yes victory and so it would be unfair to conclude that there was little fear ahead of the vote. The currency options market saw the cost of defensive premiums sky rocket in the run-up to the vote as book runners clamored for protection. So perhaps it makes sense to conclude that the answer is c) – something else. Risk appetite is firmly on with European and London-traded stocks ending the week on a high note and in the wake of fresh record highs for Wall Street. Quite what that ‘something else’ is, eludes us this morning. It could be that the pound’s honeymoon simply didn’t last long in light of the dollar’s rally. That factor continues to grab the headlines as bond yields drift higher.

Chart – The pound quickly gave it all back on Friday

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