Sterling Pounded

Sterling has been pounded by the YouGov poll that showed that those favoring Scottish independence have gained a slim majority for the first time. It does not matter that other polls have yet to confirm it. A "yes" vote was widely seen as a high impact event, though calling it a Black Swan probably does not do justice to the long planned event. The major parties in the UK are expected to announce a new devolution agreement for Scotland to entice the rejection of independence.

Sterling gapped sharply lower in Asia. It finished last week just above $1.6325, after having fallen to almost $1.6280 before the disappointing US job growth. It opened near $1.6190 in Asia. Gaps are rare in the 24-hour-a-day foreign exchange market, and we find they are often significant. From a technical perspective, the gap may be of greater significance as it will appear on the weekly bar charts as well. Sterling has yet to stabilize and made new lows in the European morning. The $1.6080 area corresponds with the 100-week moving average. The $1.60 area houses the 200-week moving average and the 50% retracement of sterling's rally since July 2012.

British asset markets have not shown the same dramatic reaction as sterling. The FTSE is under performing, but the 0.65% decline is not significant, and most European bourses are lower in any event. The 10-Year gilt yield is off a little more than 1 bp. Short-term UK interest rates, as reflected in the short-sterling futures strip, have fallen considerably, with the yield on the March 2015 contract falling nearly 7 bp to 78 bp. This is the lowest yield in a year.

The other major currencies are little changed. The euro remains in the trough seen in the reaction to the ECB's initiatives announced last week. It has been unable to find much solace in the softer US employment data. It has been confined essentially to a 15 tick range on either side of $1.2945. While the Sentix survey was disappointing, news of Germany's swelling trade surplus helps ease fears that Europe's largest economy was recession-bound after contracting in Q2.

Exports rose 4.7% after a 0.9% increase in June. Imports slipped 1.8% after a 4.5% rise in June. This produced a 23.4 bln euro trade surplus. The consensus was for 16.8 bln euro surplus after 16.6 bln in June. This follows the stronger than expected industrial production figures reported at the end of last week.

China, Hong Kong, Korea and Taiwan markets are on holiday today. China reported a larger than expected trade surplus of $49.8 bln in August after $47.3 bln in July. Exports rose 9.4% on a year-over-year basis. The consensus was for 9.0% after 14.5% in July. The bigger surprise was with imports. They fell 2.4% year-over-year. The market had expected a 3.0% increase after a 1.6% decline in July. It is the first back-to-back decline in imports since May-June 2013.

Japan revised its Q2 GDP to show a bigger contraction (7.1% vs 6.8%). This was a function of much weaker capital expenditures (-5.1% quarter-over-quarter rather than -2.5% as initially reported). This was only blunted by a larger than expected build of inventories. The net effect was a collapse of private demand (-19.2% quarter-over-quarter). Separately, Japan reported a somewhat smaller than expected July current account surplus of JPY416.7 bln. The consensus had expected a JPY444..2 bln surplus.

The dollar continues to straddle the JPY105 area, though it remains within the pre-weekend trading range today. The driving force is not an increase in US rates, which we had anticipated being the catalyst. The U.S. 10-Year yield is at 2.43%. Rather, it seems that capital outflows from Japan have stepped up and speculators have continued to amass a large short yen position. The divergence between the US and Japan's monetary stance and economic performance are palpable.

The North American calendar is light today with US consumer credit due out late in the session. The disappointing jobs data does not appear to be impacting expectations for next week's FOMC meeting, where the exit from QE and adjustments to the forward guidance are the main talking points. Canada also reported soft jobs data, which is harder to shrug off. Today it reports building permits, which should correct lower after the outsized 13.5% jump in June. A USD/CAD gain above CAD1.0920 may signal a re-test on CAD1.10.