Scotland votes: Currency traders bet against U.K. bust-up

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If the currency traders are wrong and Scotland votes Yes to independence tonight, there is going to be a lot of blood on the trading floor Friday morning.

The currency traders and voters seem to inhabit a different universe on Thursday. The former propelled the pound to its highest level against against the euro in two years, and pushed it up again versus the dollar, as they bet that Scots will vote to stay within the United Kingdom.

Voters themselves were far harder to read. Most recent polls gave the No side a lead of four percentage points. A fresh and final poll, from Ipsos Mori, released Thursday gave the No side a six-percentage-point lead. But those numbers reflect the votes of decided voters only, meaning the undecided voters – 4 per cent in the latest poll – could still swing the election. The Guardian noted that "as few as 200,000 votes could determine the outcome."

The bets of the currency traders and other investors were firmly in the No camp. The pound rose 0.3 per cent against the euro, taking it to its highest level since August, 2012. Against the dollar, the pound was up 0.6 per cent, to $1.64 (U.S.), marking a three-day winning streak. The pound, however, is still well below its recent peak of $1.71, reached in early July. The trigger for its subsequent losses was the polls showing a surge in support for Scottish independence.

The benchmark FTSE-100 index was also up, rising half a per cent in late London trading. British sovereign bonds climbed too.

In other words, there is no sense of panic whatsoever among investors about the potential bust-up of the U.K. But that's not to say that investors are not nervous. A measure of expected volatility for FTSE 100 shares has climbed 52 per cent since its recent low in late August.

RBC Capital Markets said the betting odds "implied 21 per cent chance of a 'Yes' vote, towards the bottom end of the 20-25 per cent range that has held over the last four days."

In a note, ING economist James Knightley said "we believe that the majority of undecided voters will also vote in favour of the status quo given they clearly remain concerned about the massive change a 'Yes' vote would bring. A 'No' vote would boost sterling, given [that] it removes a huge amount of uncertainty. A 'Yes' vote would see sterling plunge."

The British markets were up even thought the newest U.K. retail sales figure came in slightly below expectations. Sales grew 0.2 per cent in August; economists had expected a rise of 0.3 per cent. Still, the British economy is expanding more quickly than any other large economy in the European Union. Italy is back in recession for the third time since 2008, France is flat-lining and Germany registered negative growth in the second quarter.