BUSINESS

Canadian dollar faces uncertainty before Scottish vote referendum

09/17/2014 05:00 EDT | Updated 06/16/2017 00:57 EDT
TORONTO - With polls showing that a referendum vote on Scotland's independence is too close to call and the future of a nation remains in question, global currencies like the Canadian dollar will be under pressure.

The uncertainty Thursday may be seen in the value of the British pound as it continues a volatile path towards the outcome of the vote.

If a decision is made to separate from the United Kingdom, the Scots could be forced to look for alternatives for their currency and it may call into question Scotland's relationship with the European Union.

In the meantime, investors are playing it safe, said Camilla Sutton, chief FX strategist and managing director at Scotiabank Global Banking and Markets.

"Markets don't like uncertainty, and ... there seems to be further shedding of risk altogether," Sutton said in an interview.

"That highlights just how close the vote really is."

The Canadian dollar moved down 0.28 of a cent to 90.88 cents US on Wednesday, primarily affected by unrelated interest rate comments by the U.S. Federal Reserve.

According to a phone poll of 1,373 of Scots by Ipsos MORI, undecided voters could determine if Scotland becomes independent. Opposition to independence sits at 51 per cent while support is 49 per cent, and about five per cent of voters remain undecided.

The voting results are expected to be made public on Friday, before currency trading begins in North America.

While the impact on the loonie would be significantly less than other major currencies like the U.S. dollar, there could be a ripple effect that spreads to Canada.

A vote to separate could leave the Bank of England to decide whether it would let Scotland continue to use the British pound, an uncertainty that could strengthen the U.S. dollar against the loonie.

It could also put a damper on the recovery of the global economy, said Mark Chandler, head of Canadian FIC Strategy at RBC Dominion Securities.

"If you look over the last nine months or so, the U.K. was one area where it looked like a turnabout was coming," he said.

"(A vote to separate would) mean there's uncertain capital spending investment outlook, and that undermines the growth outlook."

Sutton suggested that if Scotland decided to separate it would "stir debate about other areas that are vulnerable to separation", such as Spain where Catalans in the country's northeast are seeking an independent nation.

However, if Scotland stays as part of the U.K. it would erase much of the uncertainty that has developed on equity markets and helped drive the value of the U.S. dollar higher.

The greenback has been moving higher in recent sessions, influenced by a number of factors that include Europe and signals from the U.S. Federal Reserve that interest rates will be hiked at some point next year.

An upwards trend in the greenback left the commodity-based Canadian currency near its lowest levels in almost six months last week, closing at 90.14 on Sept. 12.