With Scotland’s independence referendum on Thursday posing a very significant event risk for the market, Barclays is out with a note advising clients on how to position for that event.
Uncertainty mounting:
"While the polls still suggest ‘No’ votes ahead of ‘Yes’ votes, there has been increasing support for independence in recent polls. While actual votes in such referenda tend to result in lower support for independence than in the preceding polls, uncertainty around the final result has been mounting," Barclays notes.
How to position?:
"We believe put option calendar spreads appears the best hedge against a ‘Yes’ vote, while the best option for clients expecting a ‘No’ vote is to sell short-dated call options, delta hedged, to benefit from the large implied volatility risk premium. GBP will likely rebound further in case of a ‘No’ vote, though we have already seen some rebound in the past few days, while a ‘Yes” vote should exert further downward pressure on GBP," Barclays advises.
The technical view:
Technically, Barclays thinks that short-term capitulation signals room for a bounce within the recent bearish move in GBP/USD.
"A move above 1.6285 would close last Monday’s opening gap and allow room for further gains within range toward targets near 1.6350. Resistance in the 1.6500/1.6560 area is likely to provide selling interest on upticks. Our downside targets are the 1.6000/1.6050 area and further out towards the range lows near 1.5850," Barclays projects.
What is else on tap?
It will likely be masked by Scottish referendum, but we do have a series of key economic data from the UK such as CPI (Tuesday) and employment report (Wednesday) as well as BoE MPC Minutes (Wednesday) this week.
"The Minutes will be interesting given governor Carney’s recent speech where he indicated that the BoE may begin to increase the Bank Rate before wages rise. Our baseline case is a continued 7-2 split vote with MPC members Martin Weale and Ian McCafferty voting to raise the Bank Rate by 25bp from a record low 0.5%," Barclays adds.
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