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General election before Brexit could cause another 'crash,' strategist says

Key Points
  • Sterling would plummet and corporations would suffer if the U.K. held an election before Brexit, a Citi strategist told CNBC on Friday.
  • Luis Costa warned that sterling was heading as low as $1.21 in the current political climate.
  • Theresa May returned from Brussels on Friday morning after meeting EU leaders over her Brexit deal.
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Calling a general election in the U.K. before Brexit could cause a financial crash, a strategist has warned.

Luis Costa, Head of CEEMEA FX and Rates Strategy at Citi, told CNBC's "Squawk Box Europe" on Friday that Britain "absolutely" didn't need an election amid the recent chaos around Brexit.

"There would be another crash," Costa said. "I believe elections will be seen as pretty bad by investors – it raises the risks of unwanted, unfriendly market shifts and sterling is not prepared for that as yet. "

Sterling is down more than 7 percent since the start of the year. Currency analysts have predicted that the currency could remain volatile in the next few months due to the uncertainty surrounding the Brexit vote.

The currency has seen a lot of volatility since the U.K. voted to leave the European Union on June 23, 2016. While the initial moves on the day were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the currency is down nearly 13 percent since the Brexit vote.

Where did Brexit come from?

Many political commentators have argued that the U.K. should hold a general election to determine which party leads the country through the Brexit process. Although Theresa May held onto her leadership in a no-confidence vote on Wednesday, the likelihood of securing a Brexit deal before the March 2019 deadline is uncertain after the cancellation of the parliamentary vote on Tuesday.

Others are campaigning for a second referendum on Brexit, which could also trigger a snap election if the public voted to overturn its decision to leave the European Union (EU).

This week has been notably volatile for sterling, with the currency trading below $1.25 levels. Sterling is down 0.7 percent since the start of the week in a fairly fluctuating trading session.

"It's extraordinary, but this will stay with us for quite a long time," Costa said. "If you look into the option space, if you want to insure your portfolio against adverse sterling fluctuations the volatility now is extremely high."

"Corporate investments aren't super insured, so we don't believe that there's enough coverage in corporate books for a big sterling shock," he added.

Costa told Squawk Box that the pound would fall "much lower" as May attempted to persuade EU leaders to renegotiate the terms of her Brexit withdrawal agreement.

"We can break $1.21, 1.22 easily if we continue in this unfortunate block," he said. "We are coming closer to a tipping point. The position of power of our prime minister is still being battled and this trip to Brussels was unfortunately a disaster – they understand that May doesn't have the support base she wanted at this point."

Holding general elections in the UK now could cause a financial crash, strategist says