While the world holds it breath waiting for the results of the Scotland Referendum due September 18th, Numerix FX expert Udi Sela, provides his perspective on the pending results and the impact it could have on the foreign exchange markets—not to mention the broader impact it could have on the financial sector overall. Mr. Sela also contemplates an interesting options strategy to consider given this major political event.
If Scotland does in fact break away from the United Kingdom, how might this impact the financial sector within the UK?
There will be problems. You have lots of asset managers in Scotland and a number of banks and large insurance companies. At this point a number of these firms have already announced that they would move their headquarters to London as part of a contingency plan, this could present significant issues for Scotland.
Of course too, there will be difficulties in future trade between Scotland and the United Kingdom because of potential different currencies used by the two states. This creates friction and adds costs to doing business. Scotland has less than 6 million inhabitants – and not a big economy. Their main resources are oil and their financial industries. With a weakened economy, it’s an open question to see if the European Union would want to add Scotland to the Euro. Adding Scotland as an independent state could weaken the Euro further. In short, there’s is a lot of risk to consider.
If Scotland does break away, what kind of currency do you think they’ll be using in the future?
This is an interesting point of discussion. From what I’ve read, The Scot’s wanted to keep using sterling but I don’t believe that’s going to happen. I feel The Scot’s will have their own currency, in the case of a Yes vote. They will have to apply to the European Union and decide if they want to be admitted. And then they’d have to decide if they’d like to join the Euro. The European Union will also have to determine if they want Scotland as part of the Euro mechanism.
Have there already been effects in the market even though the poll has not yet finalized?
The Sterling has slumped down to the lowest it’s been since November 2013. The Pound weakened from 1.7150, during July 2014 down to $1.6030 (since this low level, the spot rate stabilized at 1.62-1.63). Since the beginning of this month the FTSE has weakened by 1%-2%.
If the final vote is a yes, what do you think the effect will be on the Sterling? Do you feel it will depreciate?