Good morning

The GBP roller coaster continues. GBP/USD o/n “explodes higher to trade above 1.62 handle at 1.6215 (as I write this). You asking what has driven this, it is simple and I am REPEATING what I wrote yesterday (I hope you managed to read our Blog!!)…here is what I wrote:

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 (BP and Shell commented yesterday that by 2050 reserves should start running dry) 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.

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.”

FINALLY this financial issue hit home and resulted in another poll showing the YES camp at 53% -vs- NO camp at 47%. Scottish independence will drive Scotland into a financial abyss, one which will take generations to recover from. Is that what the current generation want for their offspring? Hardship and financial chaos. This is WHY I HAVE BEEN REPEATING myself over the course of the past few weeks. Scotland cannot surely think they will simply adopt the GBP or EUR as a matter of fact. So when they walk into that booth to tick the box, they had better give a lot of thought as to their finances and those of their future generations. Money does not grow on trees in Scotland, nor does it come from the oil wells. With a week to go, the NO camp must now make sure this message hits home and hits home hard.

What this all means and what we have noted previously is a “resounding” no will give the GBP a major boost as it will show that when push comes to shove while the thought of independence is exciting, it does not put food on the table and roof over their heads. For this reason I must put my money where my mouth is and suggest that in my opinion the NO camp will prevail next week by a significant margin, giving the GBP a lift potentially back to 1.65-1.66 driving EUR/GBP potentially to our 0.77 handle. While this may sound far-fetched, I believe this is what we should witness once the dust settles next week.

With regard to EUR/USD, I noted (yesterday) that we are likely to see a pullback in EUR/USD as the market takes a breather before beginning the next leg lower towards my 1.2000 target. There is nothing that leads me to believe that the USD rally is over. It is merely a pause in the inevitable.

EUR/USD volatility remains above the 7 handle with 1m quoted 7.15/7.35, 3m 7.15/7.35 and 1y 7.55/7.85….while we could see the vol market trim the front end if the recovery in the EUR continues into weeks, I am still of the opinion that owning gamma is the way to trade. I suggested to a FX options trader friend to look to trade calendar spreads by selling the front end and buying 2-3 months dates. This will allow you to take advantage of a lull we are seeing yet protect yourself in the event of a sudden move.  Gov. Draghi expected to deliver his speech later today (8pm local) a week after his sudden and unexpected interest rate cut last week.  Tonight we could potentially hear some rhetoric on the proposed ECB “ABS” (Asset-Backed Securities). While I do not think the Gov. will push the subject to the point where the EUR rallies back to the low-mid 1.30 handle (remember the Gov. has often spoken of the UNWELCOME strong EUR) he will nevertheless keep the market guessing to the point where the moves continue but which are less volatile.

The next 24 hours will indeed provide us with more colour.

Good luck and all the best.