With August’s retail sales and the flash reading for September’s consumer sentiment due for release at the end of the week, one would have been forgiven for pegging Friday as having the most potential for volatility.
By Peter Martin
Monday, September 8, 2014
In comparison Monday, with very little by way of domestic economic releases, looked, on paper at least, like it shape up to be a quiet day. In the forex market, it has proven to be anything but quiet though, with some unusually large moves in key currency pairs.
The pound plummeted 1.2% against the dollar to 1.6129, today suffering its biggest drop in over a year and hitting a ten-month low earlier in the session. The currency weakened after a poll showed the campaign for Scottish independence held a lead over the pro-UK campaign, the first time any major survey has indicated a majority for a ‘Yes’ vote in the forthcoming referendum in which the Scottish people will decide whether to break from the United Kingdom or remain as part of the union. The poll suggested 51% now back a ‘Yes’ vote for independence, and 49% for ‘No’, with the referendum set to be held on 18 September.
The result comes as something of a wake-up call for the market, with GBP exchange rates previously implying a certain amount of nonchalance. Today’s slide in the value of the currency suggests market participants are now beginning to price in some of the risks for the pound that a splintered United Kingdom might bring.
A research note issued by Goldman Sachs last week warned that a ‘Yes’ vote for Scotland breaking from the UK could be bad economically for both Scotland and the remaining union. ‘In the event of a surprise 'Yes' vote, the near-term consequences for the Scottish economy, and for the UK more broadly, could be severely negative,’ said Goldman Sachs economist Kevin Daly, claiming that such an occurrence might incentivize investors to dispose of Scottish-based assets and citing uncertainty over the question of whether an independent Scotland might in a position to keep the pound as its currency.
The British government has warned that an Independent Scotland would not be able to do so. ‘In our view, the threat to disband the sterling monetary union with Scotland is credible,’ wrote Mr Daly, adding ‘Without political and fiscal integration, it is difficult to see the rest of the UK agreeing to provide a monetary and financial backstop to Scotland.’
The pound was not the only currency dropping sharply today though: the Japanese yen weakened to its lowest level since 2008 against the dollar. Japan’s economy shrank in the second quarter at its steepest pace since 2009, according to revised GDP data. A preliminary estimate had shown a 6.8% contraction in the second quarter, but that has been revised to 7.1%, suggesting the impact of the tax hikes introduced April 1 on spending was even worse than first thought — business and consumer spending both fell 5.1% in the quarter. Bank of Japan Governor Kuroda said last week that he did ‘not believe that a weakening yen is unfavorable for the Japanese economy’ and the dollar gaining against the yen was not unexpected given the differing monetary policy stances of the respective central banks.
On Wall Street, stock prices have retreated moderately: by early afternoon in New York, the Dow Jones Industrial Average was down 0.11% or 19 points, while the broader S&P 500 index suffered a more pronounced drop, losing 0.56% to stand at 1996.4. Energy companies led the decline, shedding value as the price of oil dropped. Data released earlier showing a surprise drop in Chinese imports has raised worries over future demand, knocking US crude oil futures down more than 1% today
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