Well the Scottish people have exercised their democratic will in the referendum, and they see no reason to relinquish 307 years of a fruitful partnership. As politicians on both sides have said in the aftermath, the results will stand for at least a generation. We’re all free to debate what a ‘generation’ means, but clearly any breakup discount in sterling has been vaporised. Cable (GBP/USD) has made a high of 1.6526 and has subsequently pulled back as traders square their positions, so we can assume that the levels we see now fully discount recent dollar strength and indeed any other factors that have continued to influence the markets estimation of sterling’s worth. EUR/GBP as always represents a purer view on the pound sterling and already today we have achieved a year to date low, reflecting sterling appreciation versus the euro, and we’re within touching distance of the 2013 low. In short sterling – apart from a short period in 2013 – has not been valued as highly versus the euro since 2009, a situation which has clearly more to do with the state of the Eurozone economy than the recent referendum uncertainty.


A quick recap of data yesterday. Indian GDP and GNP numbers posted a quite stunning improvement on the previous year on year numbers, 7.7% vs 4.1% for GDP; 9% vs 3.4% GNP! Wow! I’m not sure if that’s the Modi effect already, it would be surprising if it was, but it’s fantastic news for him, as it might create a feel good factor which gives added strength to a much needed economic reform process. The performance of the Indian rupee has been unspectacular so far this year, but the technicals show we are at excellent levels to commence a new round of appreciation versus the dollar. This would be at variance with a number of other emerging market currencies which have continued to weaken against the dollar, some of the moves like that of the Brazilian real have been quite aggressive of late. It has always been our view that any hawkishness from the US Federal Reserve will pressure emerging market currencies and this has clearly been in play. And developing economies with a weaker current account balance will be especially vulnerable, as we saw yesterday with the South African rand which weakened against the dollar following the decision by SARB, the central bank, to maintain the current base rate at 9.25%. It will be worth monitoring that currency pair, USD/ZAR, particularly with gold prices posting a significant drop over the last month, and general emerging currency weakness, this is a currency pair that is primed for a sustained bullish trend (USD up, ZAR down).


There isn’t much on the data front today, we’ve already seen producer prices in Germany which were in line with expectations, there doesn’t appear to be much in the way of positive price growth in the Eurozone’s largest economy, which makes it more likely that Mr Draghi, over at the ECB, will continue to look for extraordinary measures to boost activity via monetary policy. Which is a roundabout way of saying this is likely to reinforce the negative pressure on the euro for the foreseeable future. In the short term, I actually have doubts about the direction of EUR/USD, don’t get me wrong, the trend is down, but… the momentum to the downside has been weakening in September. All trends require corrections, in order to recapture the strength of the move, and I could easily see the currency pair bouncing from here over the next few weeks, with at least 1.3050 – 1.3100 being within easy reach. To be honest, we could be in for a longer period of corrective movement as the trend has been persistent for quite some time. As I said, this is perfectly natural and to be expected.


Apart from some Canadian inflation data, and a leading indicator coming out of the U.S, there’s very little left to look forward to in terms of data releases today. I will however point out that the S&P 500 has made new highs in the last few days, I can see the index blasting upwards to new higher highs over the next few months. It is the impact this paradigm will have on US treasury yields that will exercise my thinking over the weeks and months to come. Higher treasury yields pose a significant threat to emerging market assets, and also to other asset classes like junk bonds. That really matters, and could feedback adversely into overall risk sentiment. Something to watch out for, particularly in terms of how all this reflects back on the foreign exchange markets…