Chief Investment Officer Haig Bathgate's views on sterling have been gaining attention, and his comments appeared yesterday on both ITV/STV's flagship News at Ten programme and in the Daily Telegraph.
Sterling, which has already slipped against the dollar in recent days, faces more turbulence in the weeks to come as we approach the Scottish independence referendum, according to Haig. Investors tend to recoil from uncertainty, and there's nothing more uncertain than the possible break up of a country. The touchstone for this concern has been the issue of currency, and whether Scotland will be able to continue to use sterling in the event of a Yes vote – the Scottish Government claims the rest of the UK will enter into a formal currency union with an independent Scotland, but the UK political establishment has been equally emphatic that it won't officially allow Scotland to share the pound.
This then raises a host of economic questions, including that of who takes on the UK's debt? Should Scotland be excluded from a sterling union, and the Scottish Government as a result says it isn't responsible for the sterling debt amassed in recent years, that would increase significantly the ratio of debt to GDP in the remainder of the UK. And this makes the pound a less attractive prospect.
There's evidence from recent history to show that the possible break up a country leads to pressure on currencies. The Canadian dollar and the nation's bond market both suffered in the run up to votes on the secession of Quebec. With Scottish polling cards now being delivered, the prospect of Scottish independence is becoming very real indeed.
Sterling itself is already under pressure, after climbing as much as 10% against the dollar over the past year to an unsustainable level. While the pound slid yesterday on slowing inflation figures, which make the chance of an imminent interest-rate hike less likely, the data from the US is becoming much more positive, meaning the world's biggest economy might be most likely to tighten rate policy first. Throughout the period of sterling strength, we've felt that US assets such as Treasury Inflation Protected Bonds show good value for UK investors, and we have continued to buy these assets amid the referendum uncertainty.
As the vote approaches on Thursday 18th September, we are unlikely to get any answers in relation to what will happen to the pound and UK debt, and therefore uncertainty, and pressure on the pound, will increase in the coming weeks.
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