All posts from Isla
Isla in Currencies,

Pound Regains Crown as World-Beater After Scotland Vote

Photographer: Jeff J Mitchell/Getty Images

The pound reclaimed its crown as the best-performing major currency of the past 12 months after Scotland voted to keep the U.K.’s 307-year-old union intact.

Sterling has appreciated against all 31 of its most-traded peers in the past year, having trailedSouth Korea’s won and India’s rupee as the top performer as recently as yesterday. The pound is set for its biggest two-day advance versus the dollar since February as 55 percent of Scottish voters supported the “no” campaign, compared with 45 percent backing independence.

“Given the resounding result for the ‘no’ vote, it should settle a lot of the uncertainty that markets have been experiencing with regard to sterling,” Phyllis Papadavid, a senior global-currency strategist at BNP Paribas SA in London, said by phone. “Obstacles are cleared for sterling now really to go back to fundamentals.”

The currency has dominated the two-year referendum debate, with all three of Britain’s main political parties rejecting the idea of letting Scots use the pound after separation. While the Better Together campaign’s victory means there’s no need for further debate on sterling, uncertainties remain. Prime Minister David Cameron today pledged more policy making powers forScotland, as well as political change in the rest of the U.K.

The pound rose as much as 0.8 percent today to $1.6525, the strongest level in more than two weeks, and was up 0.3 percent at $1.6455 as of 7:44 a.m. in London. BNP Paribas’s “fair-value estimate” for sterling is $1.76, Papadavid said.


Britain’s currency has added 1.1 percent versus the dollar since Sept. 17. It appreciated 0.5 percent today to 78.39 pence per euro, after reaching 78.10, a level last seen in July 2012.

The pound has strengthened more than 10 percent since sliding to $1.4814 on July 9, 2013, the lowest level since 2010, and has gained 2.6 percent versus the greenback in the past 12 months.

Economists have in recent weeks forecast that a vote to reject independence would boost the pound. Twenty-one out of 31 economists surveyed by Bloomberg from Sept. 5-11 predicted sterling would trade 2 percent to 5 percent higher against the dollar a month after a “no” vote, with four forecasting gains of 5 percent to 10 percent. A nationalist victory would mean a 5 percent to 10 percent slide, 19 of the respondents said.

Hedge funds and other large speculators boosted their bullish pound bets by a net 17,279 futures contracts in the week ended Sept. 9, the biggest increase this year, data from the Commodity Futures Trading Commission in Washington show.

Pound Volatility

Today’s advance sent the U.K. currency to the strongest level against the dollar since Sept. 2, when price swings for the pound increased after a YouGov Plc poll for the Times and Sun newspapers showed the independence campaign gaining ground. The pound touched its lowest level in about 10 months on Sept. 10 after a separate YouGov poll projected the secession movement was ahead for the first time this year.

“Cable is so far making up roughly what it had lost since early this month -- which was largely risk premium,” said Ulrich Leuchtmann, the head of currency strategy at Commerzbank AG inFrankfurt, referring to the pound-dollar pair. “That’s roughly it with the effect of the referendum on the pound. Markets probably will now start to concentrate again more on the usual drivers.”

Monthly Decline

The pound is still 1 percent weaker against the dollar in September, set for a third month of declines. Sterling dropped this month after some economic data fell short of analyst estimates, and as an increasing emphasis from the Bank of England on anemic wage growth prompted investors to push back expectations for the first interest-rate increase since 2007.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors pushed back bets on a 25 basis-point increase in U.K. borrowing costs to May from, as recently as last month, February. A basis point is 0.01 percentage point.

There’s an 80 percent chance the U.S. Federal Reserve will raise its near-zero benchmark rate by its September 2015 meeting, futures data show.

“You have to presume that, when the dust settles and we start to look back at the relative fundamentals between the U.K. and other currencies, particularly the U.S.,” sterling will drop, said Greg Gibbs, the head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc inSingapore. “There is a race now between the Fed and the Bank of England, and I wouldn’t be surprised in the weeks ahead that the Fed moves ahead in that race and the pound starts to head lower.”

Edinburgh-based RBS predicts the pound will end the year at $1.60.

Gains Capped?

Other strategists also predict further gains in the pound may be limited, with sterling already giving back some of today’s advance. Britain’s currency has risen to meet the median year-end forecast of 62 analysts and economists in a Bloomberg survey, after lagging behind the estimate by 7 cents on Sept. 8. That was the biggest shortfall in almost three years.

“The relief that the currency won’t have to cope with the uncertainty of Scottish independence means the pound has rallied to remove the earlier political-risk premium,” HSBC Holdings Plc analysts, including global strategy head David Bloom, said in a client note. “But the shine had already begun to come off sterling. Any disappointment on growth, or renewed focus on the large current-account deficit, could still weigh on the currency.”