Good morning

So….there we were on Monday GBP/USD trading at 1.6645, EUR/GBP trading at 0.7895 and things looking good. Then we have a disappointing Manufacturing PMI (52.50) and a survey that says the NO vote loses ground to the YES vote in Scotland (+6bps) and all hell breaks loose. GBP TUMBLES into Tuesday trading as low as 1.6448 (vs. USD) and 0.7985/1.2525 (vs. EUR).

I sit here scratching my head. While I, in my personal opinion,  support the NO vote as in the long run Scotland will be financially and economically better off staying in the UK, the market was spooked and started an almighty sell off in the GBP.  The results of the poll also triggered the biggest rise in sterling volatility (1m up from 4.85 to 6.15) in three years, as traders rushed to insure their positions against the risk of a Scottish secession. With just over two weeks until people in Scotland vote on independence, the YouGov poll put the lead for the no campaign at six points, down from 14 points in the middle of August and 22 points early last month. Including undecided voters, 48pc said they would vote no to independence, while 42pc planned to vote yes and 8pc remained undecided.

There is a debate that could run and run about the merits of staying or leaving. But my argument is will the Scottish economy be able to stand alone considering they have no Central Bank, nor the offer to join the EU and the EUR in general. There are so many anomalies and unknown factors which the yes vote has not given supporting arguments leading me to believe that the whole process is wrought with potholes and potential disasters. The Scots will not be allowed to keep the GBP which will add an enormous amount of strain on the economy considering the amount of money Parliament gives to Scotland. So I found it interesting that as the YES vote closes on the NO vote this would be seen as negative GBP. I personally would have thought if anything it was good news and would free an enormous amount of money. Yes there are the North Sea oil fields (revenue) and a strategically important Naval base in Scotland …. but the latter would not be dismantled anytime soon. Like I said this debate could go on and on but I think I have made my point.

As I write this GBP/USD has recovered to 1.6485, though the next 2 weeks will undoubtedly bring volatility and insecurity. For this reason we are likely to see GBP vol remain bid to insure against any and all eventualities.

In EUR/GBP, again 0.8035 remains the pivot/break level which if broken could see the EUR rally to 0.8085 before we see another evaluation of the playing field. I for one do not see this happening and in fact I believe GBP will regain its lost ground against both the USD and EUR. Sentiment remains “on a knifes” edge and if you are looking at covering, I would give yourself a little more time and perhaps leave a stop order should we see another bout of GBP weakness.  In other words, leave a stop and let your “profit” run. I believe you will get better opportunities.

Asian stocks were firmer, led by China-related stocks, giving a super boost to European Stocks and later to the US market.  Asian equities rose despite the fact that US equities closed marginally lower although the S&P 500 held above 2000 while most European equity markets registered small gains. Asian equities were supported by a rise in the private sector measure of China’s services PMI, which rose to 54.1 in August from 50.0 in July. Australian Q2 GDP also beat consensus expectations, increasing 0.5%. There are three central bank interest rate decisions today from Canada, Poland and Brazil. We do not expect any of the banks to shift policy settings.

And do not forget tomorrow, BOE (unchanged) and ECB (definitely some reaction/change) will in all likelihood bring an extra amount of volatility to an already spooked market. Gov. Draghi must not disappoint after his recent comments at Jackson Hole….failure to deliver on his promise will bring serious demise to the EUR and the EU in general. It is time to put his money where his mouth is and spend. Holding back any longer will just add to an already depressed Eurozone.

Good luck and have a good day



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