Good morning

While FX volatility remains bid and ready for another (much anticipated) move in the spot market, we are witnessing a “rebound” in EUR/USD & GBP/USD. This is not to say the USD bull run has ended or the EUR bear run has ended. I actually wrote JUST YESTERDAY “If you are looking to BUY EUR v USD – wait. However do not be alarmed if we see a rebound before the next leg lower”. FX markets are notoriously known for turning.  In effect what I am saying is this is a GOOD THING as it gives the market a breather and a chance to catch its breath.

As I write this EUR/USD is trading around 1.2940 with an initial resistance at 1.2955 and then 1.3000. I suspect and believe we could very well see a reversal to these levels and perhaps beyond before the next MAJOR move lower. As I have previously stated the move in the EUR/USD has been relentless falling from 1.3750 in July to around 1.2867 lows. That in the FX markets is a monumental move and one which requires a “time out” and some form of consolidation before embarking on the next move lower. So to answer my question above, NO I do not believe for one second that the USD bull run has run its course.

GBP/USD while mirroring the EUR/USD in the ferocity of its move lower, has of course its own reasons for dropping from 1.7190 to 1.6065 low yesterday. Scotland and the USD rally is weighing heavily on the GBP and until we know the results of the referendum next Thursday, the GBP will remain highly volatile and susceptible to further sharp directional moves (mostly lower for the part given the neck/neck the YES/NO camps).

I mentioned a few days ago how questions posed to Alex Salmond regarding the currency an independent Scotland would adopt were neglected and brushed aside. Well we got confirmation from Gov. Carney (BOE) yesterday that “an independent Scotland could not enter a formal currency union to use the pound”.
This is a HUGE statement and one which the YES camp should TAKE VERY SERIOUSLY. If they thought they could simply adopt the Pound as if nothing has changed, then they are in serious trouble. This is what scares me about the YES camp. Have they actually given any thought to the future consequences of their actions. Can they really go it alone and survive? After all the North Sea oil while providing over 300,000 jobs has a limited life span and when those well run dry, then what…it is high time people put aside their differences (the love/hate relationship with the English) and think very seriously about their kids and their kids kids and how they with fair in the event the YES vote win. Do they really want to end up like the Greeks, Spanish, Irish and Portuguese? Who will bail them out in the event of a financial collapse. I bet not many in the YES camp have given any thought to that.

Adding to what Gov. Carney comments: “a currency union is incompatible with sovereignty”, adding and making it clear that an independent Scotland would fail to meet the criteria of a successful currency union. A proper union would require free trade, banking union, and a fiscal backstop, he said. “You only need to look across the channel to see what happens if you don’t have all of those components in place”, said Mr Carney. The Governor noted the Westminster view of Scottish independence would make creating the conditions for a formal currency union impossible.

Additionally and critical to this debate, use of the EUR has all but been ruled out by European Union officials, as questions over what currency an independent Scotland might use continue to haunt anti-Union campaigners. So as I have written above, I sincerely hope the YES camp do make what could potentially be a catastrophic mistake and vote with their hearts than with their heads. Humanity unfortunately can never quite be understood and this is a perfect example of that.

Major Banks including Deutsche Bank, JP Morgan, RBC, Credit Suisse, ANZ amongst others have ALL come out in favour of the NO camp commenting that an independent Scotland will spell DISASTER a magnitude of which we saw in 2008 and the financial crisis. Who will bail the Scots out? The Bank of England? why? As a major Swiss Bank recently wrote: ” In our opinion Scotland would fall into a deep recession. We believe deposit flight is both highly likely and highly problematic (with banks assets of 12x GDP) and should the Bank of England move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus). The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn. In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10% to 20% devaluation to restore competitiveness. This would require a 5% to 10% fall in wages, driven by a steep rise in unemployment. Scotland can have a huge banking industry, or it can have independence linked to sterling, but it cannot do both unless the Bank of England props up its lenders as a lender of last resort. Perhaps the Bank will do that as a courtesy gesture, but why should it”?

So there you have it. I hope on the 18th September Scotland makes the right decision, one that will keep its citizens prosperous for generations to come. Failure is just not an option.

Good day to you