LONDON (Reuters) - Sterling steadied after hitting an eight-week low on Monday, although jitters days before Britons vote on whether to leave the EU or not drove the cost of hedging against huge swings in the exchange rate to record highs.
Betting markets have lowered the chances of the country remaining in the European Union after some recent polls showed the “Leave” camp ahead, creating anxiety amongst investors.
The implied probability of a referendum vote to stay fell to around 68 percent on Monday, down about 10 percentage points from last week, according to Betfair.
Hedge funds and asset managers are increasingly seeking to protect their exposure to UK markets through derivatives, while large retail trading platforms have raised the amount customers have to deposit to trade the pound ahead of the vote.
Speculators ramped up bets against the pound at the fastest pace in nearly five years in the week to June 7 with net short positions valued at nearly $6 billion — the highest in three years. [IMM/FX]
Many analysts reckon a vote to leave on June 23 would jolt Britain’s economy and send sterling tumbling by 15-20 percent, while a vote to stay would be likely to drive the currency sharply higher. All of which means traders are braced for more volatility in the coming days.
“We expect incoming polls to move the pound more aggressively than before,” said Charalambos Pissouros, senior analyst at IronFX Global.
“If new polls continue to show a tight race between the two campaigns as we approach the voting day, the outcome is likely to become even more uncertain and hence, volatility in sterling is likely to heighten further.”
Euro/sterling one-month implied volatility, derived from an option that covers the referendum date and its aftermath, hit 26.2 percent according to Reuters data, exceeding the previous record of around 25 percent hit during the global financial crisis in 2008.
The equivalent sterling/dollar one-month implied volatility rocketed to 28.15 percent, close to its 2008 peak of around 29 percent.
The pound fell to its lowest since mid-April before recovering to trade at $1.4265, up 0.15 percent on the day ahead of a fresh set of opinion polls likely to be released later. The euro was up 0.4 percent at 79.20 pence, having hit an 8-week high of 79.865 pence earlier in the day.
The Brexit issue has dominated the market since late last year, driving a decline of more than 10 percent in sterling on a trade-weighted basis between mid-November and mid-April.
Britain’s hefty current account deficit — 7 percent of output in the last quarter of 2015 — makes the economy, and the currency, vulnerable to any pull-back in investment flows.
Worries about Brexit have also contributed to the UK economy losing momentum in recent months, and investors have pushed back rate hike expectations to the end of the decade. In fact, some in the market are pricing in a chance of a rate cut before the end of the year.
UBS said there were signs that growth may slow further in the second quarter and some policymakers on the Bank of England’s monetary policy committee could consider rate cuts.
“The market would then begin quickly to speculate on what form of easing will take place,” John Wraith, a strategist at the bank, said in a note on Monday.
“We think it is likely the Bank of England would cut interest rates first, possibly to zero. Thereafter we think the resumption of ‘quantitative easing’ in the form of gilt purchases would be favored.”
Additional reporting by Jemima Kelly; Editing by John Stonestreet and Hugh Lawson