Pound Tumbles on Scots Poll as BOE Bets Pared, FTSE Drops

Yes and No Campaigners in Scotland
Yes and No campaigners in Blantyre, Scotland, on September 4, 2014. Scotland’s nationalists overtook the anti-independence campaign in an opinion poll for the first time this year. Photographer: Jeff J Mitchell/Getty Images

The pound slid to the weakest level since November versus the dollar as opinion polls highlighted the risk Scotland will vote for independence next week, potentially splintering the U.K.’s 307-year-old union.

Britain’s currency dropped the most in more than a year against its U.S. counterpart and measures of price swings surged after a poll by YouGov Plc showed the Scottish independence campaign gained a lead for the first time this year. Shorter-maturity government bonds rallied on speculation a vote in favor of a breakup would compel the Bank of England to keep interest rates lower for longer. Financial companies with ties to Scotland helped drag U.K. stocks lower.

“The market looks to be absorbing wave after wave of sterling selling with no appreciable bounce, and to be honest, why buy it?” said Graham Davidson, a foreign-exchange trader at National Australia Bank Ltd. in London. “If they were to vote ‘Yes’ then sterling could drop another 10 percent so the tail risk is big.”

The pound slid 1.3 percent to $1.6117 at 3 p.m. New York time after reaching $1.6103, the lowest since Nov. 21, and had its biggest one-day decline since July 5, 2013. Sterling tumbled 1.1 percent to 80.22 pence per euro and touched 80.37 pence in London, its weakest level since June 12.

Market Roiled

Following months of surveys that showed Scotland was unlikely to vote to leave the U.K., the latest results have roiled the currency market. One-month implied volatility, a measure of future price swings used to determine the cost of options, surged to 9.25 percent, the highest since July 2013. It was as low as 4.26 percent on July 3 this year.

Pound-dollar options were the second-most actively traded today, accounting for 16 percent of total volume, according to trades reported by the Depository Trust & Clearing Corporation. The most active sterling contract was for options to sell the pound at $1.57.

The question of whether a go-it-alone Scotland will be able to keep the pound in partnership with the remaining parts of the U.K. has dominated the independence debate with all the major parties in London saying they would oppose it. Scottish First Minister Alex Salmond has argued they would change their view once negotiations began in the event of a “Yes” vote. He said Scotland would refuse to pay its share of the U.K. national debt if they didn’t give in. Sterling is the fourth-most-traded currency globally.

‘Knife Edge’

“The referendum is on a knife edge,” Nick Stamenkovic, an Edinburgh-based fixed-income strategist at broker RIA Capital Markets Ltd., said yesterday. “Markets have been too complacent but are now waking up to the increased risk of Scotland voting for independence.”

A “Yes” vote would prompt a significant increase in the volatility of U.K. assets, while the pound would fall against the euro and particularly the dollar, RIA’s Stamenkovic said in response to e-mailed questions yesterday.

Short-sterling futures rallied as investors scaled back expectations of an increase in borrowing costs. The implied yield on contracts expiring in December 2015 fell six basis points, or 0.06 percentage point, to 1.36 percent. Yields on two-year notes, seen as most sensitive to interest-rate expectations, dropped four basis points to 0.77 percent. Thirty-year yields rose four basis points to 3.14 percent.

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

RBS, Lloyds

After a four-week rally that sent the FTSE 100 Index near a 14-year high, investors are betting on increased stock swings. A gauge measuring volatility expectations for the equity index surged 22 percent, the most since March, after climbing as much as 44 percent.

The benchmark FTSE 100 Index of stocks closed down 0.3 percent after losing as much as 1.2 percent for its biggest two-day drop in a month. Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, the U.K. banks that lend the most in Scotland, dropped more than 1.3 percent each, while insurer Standard Life Plc, based in Edinburgh, lost 2.4 percent.

The volume of FTSE 100 shares changing hands was 30 percent greater than the 30-day average, data compiled by Bloomberg show.

Lloyds’ 1.15 billion euros of 11.875 percent subordinated notes due December 2021 fell 0.44 pence on the pound to 122.3 pence, yielding 6.95 percent, according to data compiled by Bloomberg. The securities are at the lowest since July 2013, the data show. RBS’s subordinated bonds also dropped.

Uncertain Verdict

The latest YouGov survey for the Sunday Times showed “Yes” voters increased to 51 percent, while the “No” side dropped to 49 percent, when undecided respondents were excluded. A separate poll, published by Panelbase, showed the independence campaign still needed to overcome a four-point deficit to triumph.

All three main U.K. parties said they would cede more control over policy making to the Scottish Parliament in Edinburgh after the latest opinion poll. Salmond dismissed the move as a “bribe” that wouldn’t sway voters.

A win for Scottish nationalists may have “severe” consequences in the short term and spark a pound selloff, Goldman Sachs Group Inc. economist Kevin Daly said in a Bloomberg Television interview last week. Standard Bank Plc’s head of Group-of-10 strategy Steve Barrow said it could push the pound down toward the mid-$1.50s.

Sentiment Turning

Sentiment was already turning against the pound before the jump in support for Scotland’s independence. Bank of England Governor Mark Carney last month emphasized geopolitical risks to Britain’s recovery and the weakness of wages, damping a rally in the pound that had been driven by speculation the BOE would be the first major central bank to increase interest rates. Sterling has tumbled more than 6 percent since touching $1.7192 on July 15, which was the strongest level since 2008 and is below its 10-year average of $1.7115.

“There seems to be plenty of scope for further pound declines given the pronounced degree of uncertainty and unknowns related to a breakup,” said Derek Halpenny, the head of global-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “A ‘Yes’ victory is still hardly priced in as this only has become a focus since the middle of last week when we had the first surprise poll. I see little upside for the pound now through to” the Sept. 18 referendum, he said.

Hedge Funds

Sterling dropped 2.1 percent in the past month, the worst performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes.

Hedge funds and other large speculators are the least bullish on the pound since January, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers on an advance against the dollar compared with those on a decline was 9,448 contracts last week, down from a net-long position of as much as 56,412 in July that was the biggest since 2007. The data was compiled before the latest YouGov poll.

“Given the importance of the vote on Sept. 18, the narrowness of the gap between the two camps and a market that, to date, has largely assumed that a ‘No’ vote was by far the most likely outcome, the danger is that the next few days sees a rush by investors to hedge their risks,” Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, wrote in an e-mailed note. It could prove a “dangerous September” for the pound, he said.

(A previous version of this story corrected comments from BNP Paribas SA on the potential reaction in gilts to a “Yes” vote. Corrected name of Depository Trust & Clearing Corp.)

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