Volatility expected as polls open in Scotland
18/Sep/2014 • Currency Updates•
The pound strengthened for a second day rising 0.3% against both the dollar and the euro as the markets opened. Yesterday saw the release of the minutes from September’s MPC meeting by the Bank of England with, as expected, two of the seven members voting to increase the interest rate from 0.5% to 0.75%. The other members, however, saw no need for a rate hike, citing signs of increased frailty in the Eurozone and weaker domestic housing activity, manufacturing and exports.
In addition to this announcement, and further strengthening sterling, the ONS released figures yesterday showing that the unemployment rate in the UK fell to 6.2% over the three months to the end of July. This is at its lowest level since 2008, with the number of jobless people decreasing by 146,000.
Polls are now, as of 7:00am this morning, officially open in Scotland for the much anticipated referendum on Scottish Independence. Closing of the polls will occur at 10:00pm this evening with an unofficial estimate putting the announcement between 6:30-7:30am on Friday morning. However, considering 97% of the country has registered to vote and given the logistical issues the process will inevitably encounter, a precise result may not be learnt until later on Friday.
Whatever the result, foreign exchange markets are predicted to be volatile after an announcement is made, with many economists suggesting that the pound could drop between 6-7% if Scotland were to vote Yes and rise between 3-4% if it were to vote No.
Positive economic data coming out of the UK caused the euro to fall against sterling by 0.6% in a 24 hour period yesterday. More losses were, however, restrained slightly as Eurozone data offered support for the currency. Construction output within the region increased by 0.4% YoY with the inflation rate marginally higher than estimated, again at 0.4%.
European stocks also advanced in early trade on Wednesday for the first time in nine days after recovering from a two week low. Investors are tracking Wall Street’s rally as they are scaling back expectations of a Fed interest rate hike after a WSJ report suggested that a low interest rate may remain.
Despite falling against the pound the greenback rose by 0.1% early yesterday against most of its major peers, with the US Dollar Index remaining stable during the day. This in spite of the monthly CPI report released yesterday showing that consumer prices in the US unexpectantly fell by 0.2% in August to 237.42, dropping for the first time since April 2013. Inflationary pressure is easing, suggesting that the Fed has flexibility to keep its interest rates low without risk of the economy overheating.
Chairwoman Yellen of the Federal Reserve last night announced its monetary policy decision at 7:00pm London time, with the outcome being decidedly mixed. The “dots” (in which its members pencil in there expected level of rates at the end of each year) were hawkish, signalling rates at 1.5% at the end of 2015 and therefore a hike in June at the latest. However, the key word “considerable” (referring to the time expected to elapse between the end of QE and actual hikes) was left in the statement, and Yellen conveyed a moderately dovish message in the press conference. However, markets obviously placed more weight on the “dots” message and the dollar rallied right after the statement.
Rest of the world
A Bloomberg index of 20 major developing nation exchange rates fell to within 0.3% of its weakest level since 2009. The index fell to 89.18 yesterday morning, approaching a five year low of 88.94 achieved in February. This prompted Banks such as Morgan Stanley and UBS to draw similarities to the 1997 Asian Financial Crisis, with Brazil’s real particularly struggling, falling by 4.1% against USD in the last month.
China is ready to join the ECB in stepping up its economic stimulus according to reports, causing the Malaysian ringgit to strengthen by 0.4% since Monday. China is providing 500 billion yuan of liquidity to five of the country’s largest banks, easing fears of a slowdown in the country.