Tuesday, September 9, 2014

The Scottish Referendum Trade: For AUld Lang Syne

Should one short the sterling pound betting on the Scottish Referendum? Even after the current sell-off?

Of the 4 million voting population, a 2% difference between the YES and NO means betting on 80,000 odd votes. The variation in expected turnouts may be more than that!

On the other hand the cable is naturally under pressure. With softer inflation and easing pace of recovery it is very hard to reason for a steady upward movement. The rates differential with the US has narrowed. The terms of trade does not point to any particular richness or cheapness. 

And as of latest data, the market positioning is favorable. The CME data shows the net speculative position even at the start of September was net long. So unlike yen and euro, not much pressure for a sudden short squeeze. 

If the vote is YES, there will be a large move for sure, at least in the short run. May be a sell-off worse than 5%. With a NO it can rally easily 3% to the 1.66 levels. So the odds offered will be a 37.5% chance of a YES vote.

The opinion polls put the odds at 50-50. But opinion polls are typically unreliable. Going by the wisdom of the crowd on public betting sites, the mood swung a bit recent time. The current going rate for the YES vote prices it at 32%. 

Either the wisdom of the crowd is skewed, or the market is wrong. Upside? quote a lot with the shock supported by the sell-off trends. Downside? Even if GBP goes back to the recent peak (which is, by the way, highest since 2008), it is 6%.

Pay off is asymmetric!

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