Will Sense Prevail in Thursday’s Vote for an Independent Scotland?

• Aussie dollar continues to fall on weakened Chinese industrial production;
• Scottish independence polls neck and neck ahead of Thursday’s vote;
• Greenback continues to steer FX markets ahead of busy economic docket.

Setting the pace for the Aussie dollar last week was a surprise drop in Chinese imports and weakening iron ore prices which saw the Aussie dollar collapse at the beginning of last week. As the greenback continued to gain traction ahead of this week’s FOMC meeting, which markets believe will offer guidance on improved US economic data, the Aussie continued its decline as we headed towards key labour market data on Thursday. Data confused markets, to say the least, as investors failed to see how such a significant surge in August employment was plausible and early support for the local unit was wiped out pretty quickly. A drop in the unemployment rate to 6.1% from 6.4% in the previous month was largely made up of part-time jobs which showed an increase of 121k vs expectations of only 15k. Full-time employment came in moderately lower than expectations. The Australian Bureau of Statistics has admitted that changes have been made in calculating the numbers and this was the excuse for the surprise surge in the July data. The August data was inexplicable and left markets confused, hence the aggressive sell-off after the dust settled. Chinese data over the weekend has caused the Aussie to gap lower over the weekend opening over 23 pips lower than Friday’s close this morning as industrial production slumped in August, spreading fear that the Chinese economy is slowing.

As the United Kingdom approaches a potentially historic break-up from its union with Scotland, markets have understandably favoured short positions in Sterling ahead of Thursday’s referendum on independence. As notoriously volatile opinion polls have once again put the ‘No’ camp in front, Sterling managed to claw back some of its losses suffered earlier in the week, however, when excluding those voters who remain undecided, Thursday’s vote is likely to be neck and neck. Economic data was overlooked last week and whilst traders will be keen to catch a glimpse of forthcoming data from the UK this week, I wouldn’t expect many will be willing to hold onto positions for long ahead of Thursday. An independent Scotland will be of a high cost to the UK, however we believe Scotland will pick up the larger bill and the Scottish nationalists have failed to show the real picture behind the union break-up. This leads us to believe that sense will prevail and Sterling can begin to recover after Thursday’s vote as markets begin to focus on the UK’s economic recovery once again.

Greenback strength prevailed for much of last week as markets anticipate a more hawkish FOMC meeting this week. A weaker than expected non-farms number was largely shrugged off after a report published by the San Francisco Federal Reserve suggested that markets are underestimating the chance of a rate hike in the near term. Friday’s retail sales came in as expected showing an uplift of 0.3% in August when excluding the volatile autos component. The US recovery remain firmly on track and clearly markets are beginning to price in a rate hike. Many have suggested that the US dollar will run out of steam and could be due for a pull back, however all hangs on Thursday’s FOMC meeting. Janet Yellen has been known to change her tune in the past and there is always the risk that the Fed could stand in front of further dollar support.