BLBG: Pound Lures Hedge Funds Seeing Scotland’s Status Quo
Hedge funds are more bullish on the pound than any time since July as voters in Scotland head to the polls today to decide whether to break away from the U.K.
While opinion polls show the referendum is too close to call, the latest data from the Commodity Futures Trading Commission in Washington show large speculators have a net 26,727 contracts that would profit from a gain in sterling, the most since July 25. Traders have been buying the pound even as pension funds sell, according to Citigroup Inc.
Most economists surveyed by Bloomberg say sterling could gain as much as 5 percent on a “no” vote, though buying it’s a risk because of uncertainty over whether an independent Scotland would be able to keep the pound. Nationalists have closed the gap with the Better Together campaign in recent weeks, sending sterling tumbling to a 10-month low on Sept. 10.
“Even if we were to see more brave investors venturing to buy the dip in the pound, that remains a fairly risky strategy,” Valentin Marinov, Citigroup’s London-based head of European Group of 10 currency strategy, said by phone on Sept. 16. “Anecdotal evidence still seems to suggest that, for most investors, the ‘no’ vote is the one. So for some leveraged accounts, that presented an attractive opportunity to buy.”
Biggest Jump
Hedge funds and other large speculators boosted their bullish pound bets by a net 17,279 futures contracts in the week ended Sept. 12, the biggest increase this year, the latest CFTC data show.
The buying took place as the pound weakened. After climbing to an almost six-year high of $1.7192 on July 15, sterling fell and volatility jumped as markets started to take into account the possibility that the Scots would break away.
Britain’s currency fell as low as $1.6052 on Sept. 10 after a YouGov Plc poll put the nationalists ahead for the first time this year. It’s since made up some of its losses and traded at $1.6308 as of 10:09 a.m. in London, down 1.7 percent this month.
Voters are deciding on the future of a political union that dates back to 1707, after the failure of Scotland’s colony in Panama bankrupted the nation. Polls close at 10 p.m. local time, with the results due early tomorrow.
Opinion Polls
Two opinion polls yesterday showed the anti-independence group leading Alex Salmond’s “yes” campaign by 52 percent to 48 percent and 53 percent to 47 percent, excluding undecided voters.
Options traders aren’t taking the chance that the pollsters are right. The premium for one-month contracts giving the right to sell the pound against the dollar, versus those allowing for purchases, widened to 3.45 percentage points. That’s up from 0.71 points as recently as Sept. 4, days before the YouGov survey worsened sentiment for sterling.
“Positioning is both long and short in the market,” Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London, said in a Sept. 16 interview. “Positions are split. Clearly the ‘yes’ camp is having to sell the pound in order to reflect a view or put hedges into play. The ‘no’ camp is buying.”
The news that hedge funds are betting against him may come as little surprise to Salmond, after companies from banks to retailers issued warnings to voters about the uncertainties of doing business in an independent Scotland.
Independence Consequences
Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc said they’d move to England on a “yes” vote, while Asda, John Lewis Partnership Plc and Next Plc said their Scottish customers would face higher prices if the country quit the U.K.
The currency has dominated the two-year referendum debate, with the unionists repeatedly questioning the “yes” campaign on its plans for after independence. All three main U.K. political parties rejected the idea of letting Scots use the pound after separation, though Salmond, who also leads Scotland’s devolved government in Edinburgh, has insisted they’re bluffing.
The most likely outcome after independence is the creation of a separate Scottish currency pegged to sterling, according to economists surveyed by Bloomberg from Sept. 5-11. So-called sterlingization -- where Scots would informally use the pound -- was the second most likely option. Deutsche Bank AG warned last week that such an outcome would make Scotland a “slave” to U.K. monetary policy.
The uncertainty over the currency has been “artificially high” during the campaign, and a solution would quickly be worked out upon independence, according to Ulrich Leuchtmann, the head of currency strategy at Commerzbank AG.
Commerzbank predicts sterling would end the year at $1.67 after a “no” vote, and decline 4 percent to 6 percent versus the dollar and euro if Scots vote to break away. JPMorgan Chase & Co. foresees a 3 percent to 4 percent bounce on a vote for the status quo, while Citigroup, the world’s biggest foreign-exchange trader, predicts a 2 percent gain to $1.66.
“Afterwards, we’d see in the negotiations quite quickly a change in peoples’ minds about a currency union,” Leuchtmann said by phone from Frankfurt on Sept. 16. “The uncertainty would be reduced and the negative consequences for sterling would be short-lived.”
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net
To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net Robert Burgess
