Currency Reversal on Scottish Vote

Andy Waldock  |

Thursday’s Scottish vote is quickly becoming a tossup with both sides stumping for every last undecided voter. Much has been written on the economic impact of this vote, certainly more than I have the knowledge or the space to retell here. However, there’s been a very interesting theme developing among the commercial traders heading into this vote that I haven’t seen covered anywhere else.

Most of the analysis regarding the vote suggests that it’s negative for the British Pound and Euro currencies and positive for the US Dollar. These statements, at least long-term seem pretty well reasoned. The surprising thing is that the commercial traders have been placing increasingly larger bets that the spreads between both the Euro and the Pound relative to the Dollar will tighten after the vote rather than continuing to widen. It clearly appears that they expect this to be a, “buy the rumor, sell the fact” type of trade.

The Pound has declined by nearly 6.5% and the Euro by more than 8% since their summer highs while the US Dollar has rallied more than 7% in the same timeframe. Commercial traders have decisive positions against this movement in all three markets. We’ve posted the three currency charts with their collective declines as well as the size of the commercial trader bets being placed. We’ve seen buying in the Euro and Pound in 8 out of the last 10 weeks and 11 out of the last 13 weeks respectively while the US Dollar has been sold in 9 out of the last 10 weeks.

Based on the last few days of consolidation ahead of the vote, we expect to see a volatility climax as these markets make one more move in their recent directions. The major point is that given the amount of commercial pressure being applied to these markets from the opposite side, we don’t expect to see much follow through and in fact, we expect a reversal to come swiftly and decisively. Again, a picture may be worth a thousand words. You can see exactly how the commercial traders are positioned on these three currency charts.

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