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18 Sep 2014
How to trade the Sterling on a 'Yes' vote? - Nomura
FXStreet (Bali) - If Scotland decides to votes for a 'yes' to independence, Nomura expects an unwinding of GBP long position with the repricing of a BoE hike that could send GBP/USD to 1.55-58.
Key Quotes
"The “yes” vote will likely send GBP weaker against major currencies, but the magnitude of depreciation is difficult to estimate. Our client survey conducted last week shows a majority of clients expect GBP/USD to trade below 1.55 by end-September, if the referendum turns out to be “yes”. The average end-September level of our clients‟ expectation is 1.5312."
"We expect GBP/USD to depreciate after the “yes” vote, and GBP/USD is very likely to breach 1.60 in a short period. GBP/USD has been trading weakly since mid-July, but surprisingly, the latest available IMM positioning data suggest the market still has small GBP long positions as of 9 September ($2.7bn)."
"After the “yes” vote, uncertainty for the outlook of the UK financial market and GBP should increase significantly, at least in the short term, which is likely to lead to an almost immediate unwinding of remaining GBP long positions. The unwinding of speculative GBP long positions suggested from IMM data is estimated to send GBP/USD weaker by 0.8% from 1.611 (the level as of last Tuesday), reaching 1.597 (-1.8% from the current level: 1.6280-90)."
"In addition, a “yes” vote would likely generate significant hedging activity (or outright sales) by credit and equity investors. Our client survey shows 42% of investors feel hedging is needed if the polls continue to show a very tight race, and expected hedging demand is most significant in FX."
On top of position adjustment, fundamentally, we think the negative impact of a “yes” vote on the BoE‟s monetary policy is important. GBP has been trading strongly among G10 currencies over the past 12 months, and expectations for an earlier BoE hike is one of the most important drivers of GBP appreciation."
"Our client survey suggests that the BoE is likely to start hiking in Q1 next year or before (65%), if there is a “no” vote, which is in line with our economist‟s expectations. However, only 13% of our clients believe the BoE can start hiking in Q1, if there is a “yes” vote. In other words, 80% of investors believe the BoE needs to delay the timing of the hiking cycle."
"While the views on the timing of the first BoE hike after the “yes” vote are divided, on average, the timing of the first hike is expected to be delayed to late Q3 to Q4 2015. After the last Inflation Report released on 13 August, the expected timing for the first rate hike was delayed to May 2015 from February 2015, according to our estimate."
The 2yr GBP swap rate declined by 12bp during the week, as the expected timing of the first hike was delayed by a quarter. If the expected timing of the first hike is delayed by two quarters, as suggested from our client survey, the 2yr GBP rate may fall by 25bp, which itself would depress GBP/USD by around 2%, based on the recent relationship between GBP/USD and rate spread
Key Quotes
"The “yes” vote will likely send GBP weaker against major currencies, but the magnitude of depreciation is difficult to estimate. Our client survey conducted last week shows a majority of clients expect GBP/USD to trade below 1.55 by end-September, if the referendum turns out to be “yes”. The average end-September level of our clients‟ expectation is 1.5312."
"We expect GBP/USD to depreciate after the “yes” vote, and GBP/USD is very likely to breach 1.60 in a short period. GBP/USD has been trading weakly since mid-July, but surprisingly, the latest available IMM positioning data suggest the market still has small GBP long positions as of 9 September ($2.7bn)."
"After the “yes” vote, uncertainty for the outlook of the UK financial market and GBP should increase significantly, at least in the short term, which is likely to lead to an almost immediate unwinding of remaining GBP long positions. The unwinding of speculative GBP long positions suggested from IMM data is estimated to send GBP/USD weaker by 0.8% from 1.611 (the level as of last Tuesday), reaching 1.597 (-1.8% from the current level: 1.6280-90)."
"In addition, a “yes” vote would likely generate significant hedging activity (or outright sales) by credit and equity investors. Our client survey shows 42% of investors feel hedging is needed if the polls continue to show a very tight race, and expected hedging demand is most significant in FX."
On top of position adjustment, fundamentally, we think the negative impact of a “yes” vote on the BoE‟s monetary policy is important. GBP has been trading strongly among G10 currencies over the past 12 months, and expectations for an earlier BoE hike is one of the most important drivers of GBP appreciation."
"Our client survey suggests that the BoE is likely to start hiking in Q1 next year or before (65%), if there is a “no” vote, which is in line with our economist‟s expectations. However, only 13% of our clients believe the BoE can start hiking in Q1, if there is a “yes” vote. In other words, 80% of investors believe the BoE needs to delay the timing of the hiking cycle."
"While the views on the timing of the first BoE hike after the “yes” vote are divided, on average, the timing of the first hike is expected to be delayed to late Q3 to Q4 2015. After the last Inflation Report released on 13 August, the expected timing for the first rate hike was delayed to May 2015 from February 2015, according to our estimate."
The 2yr GBP swap rate declined by 12bp during the week, as the expected timing of the first hike was delayed by a quarter. If the expected timing of the first hike is delayed by two quarters, as suggested from our client survey, the 2yr GBP rate may fall by 25bp, which itself would depress GBP/USD by around 2%, based on the recent relationship between GBP/USD and rate spread