Article 50, a new #Indyref and currency risk

Shaun Port

read 2 min

A Union divorce may be more detrimental for UK financial markets than Brexit, and vocal European views could result in a volatile pound.

Scottish bagpipe player at sunset

In the same week in which the UK parliament passed the bill allowing the government to trigger Article 50, the Scottish National Party re-launched its campaign for a second referendum on independence. The SNP wants to hold its second #Indyref sometime between autumn 2018 and spring 2019, before the UK leaves the EU.

It’s not clear how the SNP can force the UK parliament to agree to a new vote. However, public opinion could drive Prime Minister Theresa May to capitulate, perhaps agreeing to holding the vote after the UK has left the EU.

A second Scottish referendum would lead to much heightened risk for UK assets. We think the prospect of a breakup of the Union could be far more significant for UK financial markets than leaving the EU, as well as making the EU trade negotiations even more difficult.

Impact on the pound

Based on activity in the futures and options market, both the prospect of another #Indyref and the upcoming Article 50 announcement aren’t expected to lead to further marked weakness of the pound. The chart shows how the cost of betting on a sharp fall in the pound against the dollar, versus the cost of betting on a sharp rise, is not that different to normal.

Graph showing volatility between puts and calls on the most liquid OTM options

While foreign exchange markets are relatively sanguine on the near-term prospect for the pound, the same can’t be said for the medium term.

Once EU-exit negotiations begin, we expect European politicians to be much more open in their views on UK access to the single market (and border controls), especially in the lead-up to the German elections in the autumn. This running commentary is likely to result in a much more volatile pound.

Find out about how we manage currency risk in our portfolios.

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

Data sources: Bloomberg and Macrobond

Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.

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