Election 2015: why Scotland could be the biggest issue for investors

Election jitters are making themselves felt in the UK market.

As with many of these things, the tremors have started in the currency markets.

But you can expect them to spread before the big day arrives

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The pound is set to keep sliding against the US dollar

But now it's starting to look as though currency traders are getting worried about the pound for specific reasons. The upcoming election is finally registering on their screens.

According to the FT, "the currency market has registered a pronounced rise in volatility." We haven't seen the pound bounce around this much against the euro and the dollar since the last general election "and first year of the current coalition government."

Put simply, it costs a lot to place a bet that the pound will keep falling against the dollar in the relative short-term. That means there's a lot of demand for that particular bet. In other words, lots of people think that the pound is in for a hard time against the US dollar.

The big problem as we've noted before is that regardless of who gets into power in May, it's hard to see how Britain can avoid a big dollop of constitutional turmoil in the coming years.

Scotland could end up being the biggest issue in May

Some Conservative party optimists suggest that this might create an opening for a bit of a Tory revival north of the border under Ruth Davidson (believe it or not, there are some centre-right voters left in Scotland).

But even if that's the case, the Scottish National Party will be by far the biggest Scottish player come 8 May. So in a way, it doesn't matter who ends up being in charge in Westminster.

If it's Labour, they'll be dependent on Scottish support, which will increase the risk of populist, bash the rich/posh' policies being implemented, regardless of economic logic. (Free' university education in Scotland under the SNP has had the net impact of reducing the number of less well-off students going to college this is a party that cares far more about how its policies look, rather than what they achieve).

But if it's Conservative, that plays into the SNP's hands as well. They can make the usual arguments about how no one in Scotland voted for the government in Westminster. They can argue that Scotland wants to be in Europe, so why should it take part in an in/out referendum?

So we could easily get a re-run of the independence referendum. Or we could see Scotland cut loose in all but name in a badly negotiated devo-max' mish-mash by a government that can't motivate itself to stand up for the union in the face of apathy in the south and resentment in the north.

In short, any hopes that the independence question was settled for a generation are dead in the water. And until that's cleared up, it's going to hang over any assets that are affected by worries over exactly how Britain will repay its debts. In the main, that's sterling and gilts (UK government bonds).

Now, I wouldn't be keen to bet on currencies directly. It's very risky, and it's easy to wipe yourself out. On top of that, the pound is getting near the bottom of its very long-term trading range. History suggests that when the pound is trading in the $1.40s, it's nearer a bottom than a top.

It may be different this time there are good reasons to think both that the dollar can get stronger and the pound can get weaker. But it's certainly not a sure thing.

A better way to position for longer-term dollar strength is to invest in UK-listed blue chips with a lot of dollar exposure, such as GlaxoSmithKline (LSE: GSK), which I own myself.

Meanwhile, we're currently working on a report that will detail exactly what to do about the election outcome whatever the result. Our instant reaction will be going out to MoneyWeek subscribers as soon as the votes are counted. If you're not already a subscriber, make sure you don't miss out, and sign up now you'll get your first four issues free, which conveniently takes us right up to the election.