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18 Sep 2014
The Scottish Referendum: views from RBS, BBH FXpro and MSCI
FXStreet (London) - With Scotland currently going to the polls to decide the future of the Union, here is our roundup of market views on the outcome and the market implications.
Brown Brothers Harriman
Marc Chandler, Global Head of Currency Strategy
The Scotland vote today is the main event, and as important as a "yes" vote would be, it is not the only event today. There is not much more to add to the discussion. While the polls remain a statistical dead heat, the wisdom of crowds work implies giving more weight to the bookmakers and the markets, which clearly favor a "no" victory. There is some genuine concern that Scottish referendums will be a recurring theme (see Quebec) on a small victory for the unionists. Such fears, coupled with the fact that some have already positioned for such an outcome may, may curtail the positive sterling response to the a "no" vote.
RBS
Trading Desk Strategy
The GBP was relatively stable against the USD and stronger against the EUR and JPY ahead of the Scottish independence vote with one-week GBP implied volatility trading just under 14.9%, compared to an historical three-month volatility of 4.8%. However, this has eased somewhat from yesterday when it was around 17.4%. This suggests that the market is a little more confident of a No outcome, consistent with the latest polls that slightly favour a No outcome, stabilising over the final week ahead of the vote after the No-vote lead narrowed sharply in recent weeks.
The market is pricing in considerably higher downside volatility risk for GBP with the price of GBP puts exceeding the price of calls (25delta 1week risk reversals) by 4.4%
A Yes vote would be a significant surprise and may rattle global risk appetite with negative consequences for Emerging currencies. It may also trigger profit-taking in long positions in USD against EUR and JPY, even though the implications may be more negative for the EUR. A No vote may be moderately supportive for GBP and broader risk appetite.
MSCI
ESG Research
If Scotland votes for independence, it could have long run implications on the environmental, social, and governance risks facing both the UK and Scotland. At present, UK's ESG Government Rating is 'A' with a Stable outlook. In general, a vote for independence by Scotland does not promise to bear overall positive fruit for either the UK or Scotland from an ESG perspective. If Scotland votes for independence, it is bound to result in downward pressure on the ESG score for both the UK and Scotland.
Over 90% of the UK's oil and gas reserves are located in Scotland, and a vote for independence would lead to the transfer of a large portion of reserves to the newly formed country.1 While the territorial proportion of oil revenues from the North Sea between Scotland and the UK has not yet been finalized, what is largely assumed is that Scotland walks away with a major share.
While Scotland tends to win big on natural resources, its wins could be dwarfed by its weaker performance on important socio-economic parameters. Firms are wary of how an independent Scotland will manage its industries as it struggles to adjust to its new identity. If Scots vote for independence, a considerable number of companies have stated their intention to re-locate from Scotland to England. Further, Scotland has an ageing population, with close to 17.4% of its population over the age of 65 years.
With independence, the buck would pass on to Scotland to bear the associated social expenditure. Expenditure on social services provided to Scotland by the UK is already higher than in the rest of the country (public spending at GBP 12,629 per person compared to GBP 11,381), and expected to rise if Scotland secedes.4 Additionally, if the vote for independence goes through, Scotland is likely to witness a large flight of its intellectual capital, which is expected to migrate to the UK on the prospects of securing professional opportunities. Labor supply in the UK ex Scotland is projected to increase by 12% by 2060, as opposed to in Scotland, where it will remain flat.
FXpro
Angus Campbell, Senior Analyst
So, how will sterling react in the event of a Yes or No vote? Forecasting FX rates are notoriously difficult however we have put together some thoughts below:
YES VOTE
A yes vote will cause an immediate sell off in sterling as it has not been fully priced into the market. We saw GBPUSD fall 4 cents following the You Gov poll some ten days ago that showed the Yes Campaign in the lead for the first time ever, a 2.5% fall, but if the vote for independence succeeds then a much bigger sterling sell off can be expected possibly in the region of 5% taking GBPUSD well below the 1.6000 level where it would likely stay and fail to recoup over the medium, even longer term, as the dollar continues to recover.
Against the euro sterling could suffer less of a dramatic fall due to the ECB’s continued loosening of monetary policy and should recoup losses into the year end as central bank policy reaffirms the divergence between the BOE and ECB, even if rate hike expectations from the BOE are pushed back as a result of the yes vote.
NO VOTE
This result would be a boon for the British pound which should see a strong relief rally in the short term as all the worries over how assets and liabilities will be split are swept firmly under the carpet. I say “swept” because the issue is highly likely to resurface at some point in the future, especially if the Scottish National Party maintains its grip on power in Holyrood.
Sterling’s strength however may not last all that long as the existing trend re-establishes itself. The dollar recovery looks to be becoming entrenched and so any bounce in GBPUSD could be largely eradicated come year end.
The one thing that we can expect for sure is that with such a close race volatility overnight on Thursday and throughout Friday is going to be high. My personal opinion is that the No Campaign will win on the day – it’s one thing saying you’ll vote for independence, it’s another when you are standing in the polling booth and actually casting your vote, when often a voter reflects on the significance of such a decision and is more likely to stick with the status quo.
Brown Brothers Harriman
Marc Chandler, Global Head of Currency Strategy
The Scotland vote today is the main event, and as important as a "yes" vote would be, it is not the only event today. There is not much more to add to the discussion. While the polls remain a statistical dead heat, the wisdom of crowds work implies giving more weight to the bookmakers and the markets, which clearly favor a "no" victory. There is some genuine concern that Scottish referendums will be a recurring theme (see Quebec) on a small victory for the unionists. Such fears, coupled with the fact that some have already positioned for such an outcome may, may curtail the positive sterling response to the a "no" vote.
RBS
Trading Desk Strategy
The GBP was relatively stable against the USD and stronger against the EUR and JPY ahead of the Scottish independence vote with one-week GBP implied volatility trading just under 14.9%, compared to an historical three-month volatility of 4.8%. However, this has eased somewhat from yesterday when it was around 17.4%. This suggests that the market is a little more confident of a No outcome, consistent with the latest polls that slightly favour a No outcome, stabilising over the final week ahead of the vote after the No-vote lead narrowed sharply in recent weeks.
The market is pricing in considerably higher downside volatility risk for GBP with the price of GBP puts exceeding the price of calls (25delta 1week risk reversals) by 4.4%
A Yes vote would be a significant surprise and may rattle global risk appetite with negative consequences for Emerging currencies. It may also trigger profit-taking in long positions in USD against EUR and JPY, even though the implications may be more negative for the EUR. A No vote may be moderately supportive for GBP and broader risk appetite.
MSCI
ESG Research
If Scotland votes for independence, it could have long run implications on the environmental, social, and governance risks facing both the UK and Scotland. At present, UK's ESG Government Rating is 'A' with a Stable outlook. In general, a vote for independence by Scotland does not promise to bear overall positive fruit for either the UK or Scotland from an ESG perspective. If Scotland votes for independence, it is bound to result in downward pressure on the ESG score for both the UK and Scotland.
Over 90% of the UK's oil and gas reserves are located in Scotland, and a vote for independence would lead to the transfer of a large portion of reserves to the newly formed country.1 While the territorial proportion of oil revenues from the North Sea between Scotland and the UK has not yet been finalized, what is largely assumed is that Scotland walks away with a major share.
While Scotland tends to win big on natural resources, its wins could be dwarfed by its weaker performance on important socio-economic parameters. Firms are wary of how an independent Scotland will manage its industries as it struggles to adjust to its new identity. If Scots vote for independence, a considerable number of companies have stated their intention to re-locate from Scotland to England. Further, Scotland has an ageing population, with close to 17.4% of its population over the age of 65 years.
With independence, the buck would pass on to Scotland to bear the associated social expenditure. Expenditure on social services provided to Scotland by the UK is already higher than in the rest of the country (public spending at GBP 12,629 per person compared to GBP 11,381), and expected to rise if Scotland secedes.4 Additionally, if the vote for independence goes through, Scotland is likely to witness a large flight of its intellectual capital, which is expected to migrate to the UK on the prospects of securing professional opportunities. Labor supply in the UK ex Scotland is projected to increase by 12% by 2060, as opposed to in Scotland, where it will remain flat.
FXpro
Angus Campbell, Senior Analyst
So, how will sterling react in the event of a Yes or No vote? Forecasting FX rates are notoriously difficult however we have put together some thoughts below:
YES VOTE
A yes vote will cause an immediate sell off in sterling as it has not been fully priced into the market. We saw GBPUSD fall 4 cents following the You Gov poll some ten days ago that showed the Yes Campaign in the lead for the first time ever, a 2.5% fall, but if the vote for independence succeeds then a much bigger sterling sell off can be expected possibly in the region of 5% taking GBPUSD well below the 1.6000 level where it would likely stay and fail to recoup over the medium, even longer term, as the dollar continues to recover.
Against the euro sterling could suffer less of a dramatic fall due to the ECB’s continued loosening of monetary policy and should recoup losses into the year end as central bank policy reaffirms the divergence between the BOE and ECB, even if rate hike expectations from the BOE are pushed back as a result of the yes vote.
NO VOTE
This result would be a boon for the British pound which should see a strong relief rally in the short term as all the worries over how assets and liabilities will be split are swept firmly under the carpet. I say “swept” because the issue is highly likely to resurface at some point in the future, especially if the Scottish National Party maintains its grip on power in Holyrood.
Sterling’s strength however may not last all that long as the existing trend re-establishes itself. The dollar recovery looks to be becoming entrenched and so any bounce in GBPUSD could be largely eradicated come year end.
The one thing that we can expect for sure is that with such a close race volatility overnight on Thursday and throughout Friday is going to be high. My personal opinion is that the No Campaign will win on the day – it’s one thing saying you’ll vote for independence, it’s another when you are standing in the polling booth and actually casting your vote, when often a voter reflects on the significance of such a decision and is more likely to stick with the status quo.