Poll Suggests Scottish Independence Could be a Reality | Daily FX Commentary

• Aussie dollar collapses overnight following surprise drop in Chinese imports;
• Sterling remains in the firing line as Scottish independence may become a reality;
• Researchers at Federal Reserve warn that investors are underestimating increased rates;
• Japanese 2Q GDP revised to show 7.1% contraction, USDJPY breaks ¥106.

Although local markets received news of slowed Chinese imports with a pinch of salt, overseas markets were not so kind to the Aussie dollar as it collapsed 80 points from Monday’s open overnight. Combined with continued declines in iron ore prices and a strong US dollar, the Aussie opens this morning at $0.9280. Weakening iron ore prices have been a theme for some time now and losses overnight are more attributable to the weak Chinese import data and continued speculation that the Fed will move to rates sooner than expected, reducing the attractiveness of the carry trade that has been supportive of the Aussie dollar this year.

Reduced expectations of a rate hike from the Bank of England, amongst a backdrop of mixed economic data and vote of Scottish independence are key to Sterling’s downward trajectory at present. Gains were extended on Monday after a poll by YouGov showed the ‘Yes’ camp for Scottish independence took the lead for the first time. As markets remain of the opinion that such uncertainty will delay any chance of a UK interest rate hike, Sterling remains under pressure and we struggle to see any significant upside ahead of the vote next week. Given the detrimental implications that Scottish independence would carry, in particular walking away from debt obligations to the UK, we are of the opinion that sense will prevail and the 300 year-old union will be maintained, in which case Sterling would inevitably find its feet, eventually.

A report from the San Francisco Federal Reserve suggested that low volatility across financial markets indicates that investors are underestimating the likelihood of a near-term interest rate hike in the US, leading to broad greenback support overnight. The US dollar index rose to a 14-month high on the comments and it appears that the greenback rally still has more to give. The Euro remained under pressure given last week’s events at the ECB and Mario Draghi’s commitment in using unconventional monetary policy, and it appears that traders will sell given any excuse.

Revised second quarter Japanese GDP (-7.1% vs -6.8% previously) led to a broad Yen sell off, USDJPY now trades above ¥106 for the first time since 2008. It appears that April’s increase in consumption tax was more significant on the Japanese economy than initially thought. Minutes from the Bank of Japan’s August meeting will be released this morning.