For Harris Tweed Hebrides Ltd. boss Ian MacKenzie, the question of whether an independent Scotland would keep the pound is crucial to his textile company’s future. For foreign-exchange traders, the issue barely registers.
The pound was the only Group of 10 currency for which a measure of anticipated volatility fell in the past month through yesterday, data compiled by Bloomberg show. That suggests traders are dismissing the prospect of an upset in the Sept. 18 referendum, as opinion polls show an advantage for the unionist “no” campaign.
Traders believe “there’s a close to zero chance of the vote passing,” Geoffrey Yu, a senior currency strategist at UBS AG in London, said in a phone interview. “The chances are so slim it’s hard to have a conversation beyond the hypothetical.”
The currency dominates the debate over whether Scotland should remain part of the 307-year-old union with England. All three main U.K. political parties insist an independent Scotland wouldn’t be able to use sterling, though nationalists say that’s a bluff, with Nobel Prize winners Joseph Stiglitz and James Mirrlees backing their position.
The uncertainty is a “huge worry” for the 62-year-old MacKenzie, whose company employs more than 200 people and exports about 70 percent of the fabric it produces.
“We sell in sterling and only in sterling, so if we were to move from that it would be a concern,” MacKenzie said in an interview last week from Scotland’s Isle of Lewis. “The polls still point to a victory for ‘no,’ though nobody should be complacent.”
In a letter published today and cited by Scottish newspapers, more than 120 executives said the case for independence hadn’t been made and that uncertainty surrounds issues including the currency. MacKenzie was among the signatories, which ranged from HSBC Holdings Plc Chairman Douglas Flint to Jimmy Buchan, skipper and owner of the Amity Fish Company on Scotland’s northeast coast.
Three-month implied volatility for the pound-dollar rate fell to 5.30 percent yesterday, from 5.41 percent on July 28 and compared with a seven-year low on a closing basis of 5.03 percent on June 6. That’s the only decline in the G-10 in the past month, and contrasts with a 0.95 percentage-point jump in yen volatility to 6.50 percent, data compiled by Bloomberg show.
“There’s been little market reaction to the prospect of the Scotland referendum, which would appear to reflect an assumption that the result will be a ‘no’ vote,” Callum Henderson, the global head of foreign-exchange research at Standard Chartered Plc in Singapore, said by e-mail.
The lead enjoyed by the “Better Together” campaign is slipping.
An ICM opinion poll for the Scotland on Sunday newspaper on Aug. 17 put the “no” vote at 55 percent, down two points from a month earlier, while support for the pro-independence “yes” campaign climbed two points to 45 percent. Most polls reveal enough undecided voters to suggest that a large swing toward the nationalists could leave them victorious.
Scottish National Party leader and First Minister Alex Salmond clashed on the pound this week with rival Alistair Darling, the former U.K. Chancellor of the Exchequer who leads the unionist campaign.
In the politicians’ second and final televised debate on Aug. 25, Darling said a currency was a nation’s “bedrock,” and that uncertainty over the legal tender “can bring a country to its knees.” Salmond reiterated his position that there’s nothing to stop an independent Scotland from using the pound, even if that meant monetary policy would be dictated across the border by the Bank of England.
A formal currency union would be an “excellent arrangement,” Mirrlees, who’s part of Salmond’s advisory group on the financial implications of independence, said in a Bloomberg Television interview on Aug. 21. Fellow Nobel laureate Stiglitz is also part of the group, which recommends Scotland seek to retain the pound.
Rather than being driven by the Scots independence debate, strategists say the pound’s peaks and troughs this year have been dictated by the prospect of the BOE becoming one of the first major central banks since the financial crisis to raise interest rates.
Sterling touched a five-month low of $1.6501 on Aug. 25, tumbling 4 percent from a post-crisis high of $1.7192 in July. It was at $1.6574 as of 12:15 p.m. in New York, still the biggest gainer after the New Zealand dollar in a basket of 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes in the past year, strengthening 7.8 percent.
Major companies with operations in Scotland are less sanguine about the future of sterling north of the border.
BP Plc, power-generator maker Aggreko Plc and insurer Standard Life Plc have raised concern in recent months over what currency Europe’s newest state would use, and who would be its lender of last resort. Standard Life said in February it was preparing to shift business elsewhere should Scots vote for independence because of risks surrounding the currency and financial regulation.
Back on Lewis, MacKenzie, who was born on the island and learned the trade of weaver from his father, is concerned about both issues.
“With so many of those export markets, we’re dependent on the exchange rate,” said MacKenzie, who plans to vote “no” in the referendum in three weeks. “We don’t know if a Scottish currency would be weaker or stronger. That’s a huge uncertainty.”
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