Yahoo Finance Traders warn of turmoil for pound if Scotland backs independence bid
The pound could swing in coming months as traders wake up to the threat that Scottish elections pose to the union, analysts have warned.
Strategists in the Square Mile said that a heavily pro-independence vote in next month’s Scottish Parliament election could hold sterling back and mean that investors once again shun British stocks.
Stephen Gallo, European head of currency strategy BMO Capital Markets, said: “Come early May the markets will wake up to this and probably trade the size of the majority or the end result.
“The stronger Nicola Sturgeon’s position is, the more headline risk there’s going to be over the next three to six months regarding this issue.”
He said the moves are unlikely to be enormous but warned a strong SNP showing would make it tougher for sterling to extend its rally.
Watch: SNP releases campaign video ahead of May 6 elections
The pound has jumped since a trade agreement was sealed with the EU, climbing from below $1.16 when Covid hit to almost $1.38 now. But more political uncertainty after May 6 could mean risk-averse investors shun UK assets, as was the case during the Brexit saga.
SNP leader Ms Sturgeon has already vowed to push for a second referendum and her hand will be strengthened if pro-independence parties win more than 50pc of the vote.
Sharon Bell, a strategist at Goldman Sachs, saidL “Another messy prolonged period of political uncertainty, coming straight after 5 years of Brexit uncertainty, would be unlikely to encourage global investors back to UK stocks.”
She said another Scottish referendum is a risk but said UK stocks are still extremely cheap after underperforming on Brexit jitters.
UBS strategist Stephen Caprio added that polls in Scotland point to volatility ahead for bank bonds known as AT1s. A strong rally for the bonds on hopes of an economic recovery in the past few months could now leave them vulnerable, he said.
The SNP currently rules in a minority government after falling just short of an outright majority in 2016. But polling suggests that it is on course to clear that hurdle this time around, increasing pressure on Boris Johnson to accept another independence vote.
An Ipsos Mori poll for STV News this week predicted that 70 of Holyrood’s 129 MSPs will be from the SNP, handing Ms Sturgeon’s party an 11-seat majority. The Alba Party, set up by former first minister and arch-Sturgeon critic Alex Salmond, threatened to upend the race but has failed to make a dent in polling.
Jordan Rochester, currency strategist at Nomura, said: “It matters more when we actually get a date of another proposed referendum, as then the market will foreign exchange hedge that event risk.”
He argued any hit the pound from a SNP majority will be limited unless the party strongly beats expectations, which would increase the chances of a referendum gaining permission from London.
Mr Rochester said that vaccine trends and investor flows will be bigger drivers of the pound, but that the market will be affected if another referendum is held.
Watch: Why life has been ‘extremely challenging’ on the Scottish islands with just 70 COVID cases
