The pound, enjoying a period of calm after 4-1/2 years of Brexit-linked chaos, may suffer some turmoil if an election next week raises the chances of Scottish nationalists calling — and winning — a vote on independence from the United Kingdom.
Polling currently suggests around half of voters would opt for independence.
Such a vote is unlikely for some time, and indeed the United Kingdom government says it will not permit one at all. But analysts reckon the chance of Scotland breaking away, while still small, is rising, and the pound will react if and when a referendum looks like a certainty.
“If a country accounting for 7.5 per cent of the UK’s GDP decides to go its own way, it matters for the market,” Nomura foreign exchange analyst Jordan Rochester said.
Prime Minister Boris Johnson has vowed to block another referendum after the last one in 2014 — economists and analysts interviewed by Reuters mostly expect him to stick to that.
Citi, on the other hand, estimates a 35 per cent probability of “Scexit” in the next 10 years — too distant to immediately impact investor behaviour. Probabilities based on odds by online betting exchange Betfair show most punters do not expect an independence vote at least until after 2025.
Stephen Gallo, European head of FX strategy at BMO Capital Markets, calls the elections a “moderately important issue”, which may have caused some recent sterling weakness.
The consensus is “there will be a second referendum at some point” and that the Scottish government will find a way to have an advisory referendum if Johnson blocks a straightforward vote, he said.
Pricing the timing of a referendum is only part of the puzzle for currency traders. Understanding the impact on the UK economy — and the pound — is another.
Sterling dived by “ten big figures” — market parlance for ten cents — against the dollar as the probability of a Scottish “Yes” vote surged in 2014, Citi analysts note
But ending the 300-year old union is unlikely to prove as economically damaging as Brexit or COVID-19.
A UK economy shorn of Scotland may even emerge stronger.
JPMorgan economist Allan Monks says declining North Sea oil revenues “would probably leave Scotland with a larger fiscal deficit than the UK in the event of independence”.
Whether Scotland would take a share of the UK’s 2 trillion pounds of public debt is another unknown.