The political uncertainty that would follow a Yes vote in the Scottish referendum "is likely to be negative" for sterling, according to the world's largest foreign exchange dealer.
Deutsche Bank said the scale of the impact would depend on what monetary option Scotland ends up with, with a continuing currency union seen as "the least negative" option.
All major UK parties have ruled out sharing the pound with an independent Scotland, despite the Scottish Government's insistence that it would be in the best interests of both nations.
Unilateral use of the pound or a separate currency is the most likely option if a sterling-zone is denied, while the euro is "one of the least attractive options" and a "distant possibility", Deutsche Bank said in a research paper on Scottish independence.
While Scottish independence would be "bad for sterling" the currency may benefit from "a capital flight to the continuing UK", with Scottish firms relocating south of the border and propping up the pound.
Deutsche Bank said: "Whatever decisions might be made in the aftermath of a vote in favour of independence, with the rest of the UK being Scotland's most important trading partner, it will be important that any negotiations leave Scotland in a financially viable position.
"When it comes to the impact on the financial markets, we suspect that the period of uncertainty during the negotiation phase that a Yes vote would generate would be negative for both gilts and sterling."
It added: "Political uncertainty during the negotiation period is likely to be negative for the currency, with the scale of this depending on what monetary policy option Scotland eventually plumps for.
"A sterling currency union may prove the least negative, as it leaves the size of the economy covered by sterling the same and a formal agreement could help reduce the political risk premium.
"Sterlingisation could potentially be worse for the currency given the presumably greater chance of Scotland eventually ditching sterling in favour of a new Scottish currency.
"Euro membership for Scotland would reduce the size of sterling's coverage which in turn may be more negative for sterling, while a new currency could potentially be worst of all for sterling as in addition to reduced coverage, trade becomes more costly than the cases of retaining sterling/shifting to the euro, and the sterling area current account deficit would be higher thanks to the loss of oil exports.
"While it seems likely that an independent Scotland would be bad for sterling, particularly in the near-term as political negotiations take place, an offsetting positive impact might be in the form of capital flight to the continuing UK.
"The risk of capital flight following independence (or even following a Yes vote) may make a formal currency union difficult to sustain, just as was the case with the Czech/Slovak monetary union in the early 1990s which lasted just six weeks before breaking down.
"The failure of Scotland to assume its fair share of the national debt along with the risk of a depreciation in a new Scottish currency could also trigger capital flight by worried savers ahead of any decisions being made."
Scottish independence is also likely to herald constitutional changes at Westminster, and potentially another general election immediately after Scottish independence day, Deutsche Bank said.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article