Sterling steadied on Thursday on the back of some more comforting polling for financial investors worried by the prospect of Scottish independence, with all eyes peeled for the next round of surveys. A feverish run in to the Scottish vote next week has seen sterling fall and more warnings from Britain's political and business elite about the risks of job losses, investor flight and financial uncertainty.
The newest poll on Wednesday showed the pro-union camp ahead by 53 percent to 47 percent, an improvement on a weekend reading which gave a majority for independence, but still leaving the market deeply sensitive to further surveys. YouGov told Reuters it would publish its latest poll later on Thursday and there was also the prospect of a spot phone poll done by another of the main UK agencies, ICM, for the Guardian newspaper. It was unclear exactly when either would be released.
"It's all about the polls for the next few days, unless we get a clear turn towards 'No' again, and even then I don't think anyone's going to sleep very easy next week," said one London-based dealer. Sterling traded at $1.6231, up 0.1 percent but broadly steady after an initial jerk higher at the start of trading in London. On Wednesday, the pound had hit a 10-month low of $1.6051.
The euro was flat at 79.74 pence. Citibank strategist Josh O'Byrne said he saw little appetite to take up aggressive positions ahead of the vote. "You probably don't want a position over the weekend given that we could have another gap (in pricing) on the Sunday open," he said. "The consensus now is more or less settled on it being a reasonably close vote.
"The YouGov poll may be a bit more significant for markets, given that its previous poll showed a Yes lead. If it reversed we might see a bit more of a positive reaction. "But otherwise it's very difficult to say that the next poll of 1,000 people is more or less accurate than the last or telling us much about the latest consensus," he added. The referendum jitters come after a rough couple of months for the pound, which is now around 10 cents lower against the dollar since mid-July. A Yes vote would raise a wide range of financial uncertainties for the UK economy and add to the case for the Bank of England to hold fire with any rise in interest rates until well into next year.
Investors, including hedge funds, have also sought protection against sharp fluctuations in the pound and the cost of hedging for the next week, which covers the Scottish referendum, jumped to 13-month highs on Thursday. One-week sterling/dollar implied volatility rose to a high of 11.725 percent, according to Reuters data, its highest since July 2013. One-week options expire on September 18.
"It is very rational that the one-week implied vols are elevated as international investors are waking up to all the issues and the implications from the vote," said Jeremy Stretch, a currency strategist with CIBC World Markets. Many investors fear that a Scottish split would leave Britain saddled with higher debt and a smaller domestic market that could hurt future investments. More debt could lead to a possible downgrade by rating agencies and outflows from Britain.
The pound is centre-stage in the heated debate over Scotland. The pro-independence leader, Scottish First Minister Alex Salmond, says Scotland will share the pound. Westminster has ruled that out, leading to uncertainty about the currency. Wading into the controversy, Bank of England Governor Mark Carney said earlier this week that a currency union between an independent Scotland and the rest of the UK would be "incompatible with sovereignty".
In any case, a "Yes" vote is likely to see further weakness in sterling and UK assets. Analysts at Bank of New York said when previous crises have hit the pound - the mid-1970s, when inflation and a high budget deficit took its toll, 1992 when Britain was forced to abandon the European exchange rate mechanism and 2008, when the global financial crisis began - sterling lost an average 32 percent against the dollar. "On the current evidence, the outcome of next Thursday's referendum is too close to call," they said in a note. "Given this, having an understanding ahead of the vote of positioning, the potential risks and sterling's history of large scale moves is of value."