Sterling sank by 1 per cent to a seven-week low to the dollar yesterday as the cost of hedging against swings in its value around the June 23rd referendum on Britain's European Union membership rose to the highest in seven years.
Since falling to a low of $1.38 in February, the pound has held up well in the face of concerns that a vote to leave would undermine economic growth and create problems with financing of the country’s huge current account gap.
But with two weeks to go until the referendum, speculative investors and companies have pushed up the cost of hedging to imply swings of as much as 24 per cent in the value of the currency over the next month.
That seeped through into spot rates for sterling itself as U.S. markets came on line yesterday, pushing the pound back below $1.44 and 0.9 per cent weaker at 78.82 pence per euro.
"It's broken through the 100-day moving average which I think was a bit of a target," said Sean Dakin, senior FX sales dealer at Mizuho.
“The market just continues to be risk-off and to pound sterling. It’s been heavy all day and then it just seems to have gone through some levels but there does seem to be some support above $1.43.”
Threat
The threat of Brexit has dominated since late last year, driving a decline of more than 10 per cent in sterling on a trade-weighted basis between November and April.
Risk reversals are heavily skewed to sterling "put" options, showing investors are most worried about Brexit's threat to sterling. "The fact is we're getting closer to the day and there has been a shift in the betting odds this week so we are seeing that in the options market," said Dominic Bunning, a strategist with HSBC in London.
Some retail investors have also been buying exchange-traded funds that allow them to short sterling, echoing a trend that was evident before Scotland’s 2014 referendum on independence.
Jump in sterling
Dealers and strategists say investors also want to be positioned for a jump in sterling if Britons vote to stay in the EU. Trading desks expect the pound would gain to around $1.50-1.51 on a vote to stay.
“When you look at sterling itself, we would argue it is close to fairly valued given the extent of the risk that betting markets show,” Bunning said.
While polls have been mixed, a number of online surveys have tended to lean more towards the “Leave” camp. A poll for the BT.com website yesterday showing 80 per cent of its readers planning to vote to leave the EU also caught the eye of dealers.
"The nearer we get to the event, the more nervous markets will naturally become," said Lee Hardman, currency economist with Bank of Tokyo-Mitsubishi UFJ in London. – Reuters