GBP Votes To Shrug Off Referendum Risk

 | Sep 11, 2014 06:16AM ET

GBP pairs are recovering smartly as it looks from where I sit, that the market uncertainty level on the Scottish referendum is fading fast after new polling results counter the previous polls showing the "yes" vote gaining momentum. Implied options volatility is still very elevated, but the rates picture at the front end of the curve and spreads on long gilts suggest to me that the market isn’t pricing much in outside of perhaps placing far out-of-the-money hedges in GBP. GBPUSD is looking more and more like a sell on as the action takes us back toward 1.6250/1.6300, while EURGBP downside might be the way to look for further GBP relief. I’ll have more on the Scottish referendum later today. Australia saw an off-the-charts strength in payrolls growth in August that was almost twice as strong as the highest reading over the past 10 years. As well, the participation rate jumped higher, though the payrolls number was so strong that the unemployment rate still dropped all the way to 6.1%. This data point is not in fitting with other data from Australia nor the steady drop in consumer confidence, so I am taking this release with more than a grain of salt until we gather at least another couple of months of data. A Bloomberg article cites Australia’s statistics bureau, which said that “a rotation in its survey group affected today’s figures.” As well, over 80% of the growth was in part-time positions. All of this makes it risky to predict mean reversion at the September payrolls (the normal pattern in the past is that spikes mean revert over subsequent months) as this could be a step-wise change due to a new data collection regime. Hard to tell, the only thing for sure is that this single data point doesn’t tell us much. AUDUSD The strong payrolls number had short rates in Australia jumping higher and AUD rallying overnight. The first key area where the action is settling is around the 200-day moving average near 0.9180, but the ultimate structural resistance will be the old head and shoulders neckline that was taken out in recent days. While resistance may be tested, I continue to prefer the downside unless we close above 0.9250.