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Tuesday, 7 June 2016

Brexit worries drag pound to three-week lows, volatility soars

A two Euro coin is pictured next to a one Pound coin on top of a portrait of Britain's Queen Elizabeth in this file photo illustration shot March 16, 2016.  REUTERS/Phil Noble/Illustration/Files - RTSDQ2C

Sterling touched a three-week low on a trade-weighted basis on Monday and the cost of protection against swings in the currency over the next month hit its highest since late 2008 on concern that support for Britain leaving the European Union is growing.

Polls published on Monday, ahead of a June 23 referendum, gave the "Leave" campaign a lead.

Bookmakers shortened their odds, with betting website Betfair putting the chances of a vote to leave at 31 percent. Odds at the end of last week implied a 27-percent chance of Britain leaving the bloc.

Sterling was last down 0.3 percent on the day at $1.4465 (£1.0), having fallen as far as $1.4352, its lowest for three weeks, in early Asian trading. It recovered from those lows in afternoon trade in London as the dollar came under pressure before a speech by Federal Reserve chair Janet Yellen.

The euro gained 0.3 percent to 78.55 pence.

Sterling's trade-weighted index was flat at 85.9, having hit a three-week low of 85.5.

"The polls are likely to make people rather uneasy and we can see that quite clearly today in the pound," OANDA senior market analyst, Craig Erlam, said.

"With both sides likely to step up their game over the next couple of weeks, I imagine we'll see a lot more volatility in the pound and the closer the polls get, or if 'Vote Leave' continues to push ahead, the pound may find itself back towards April's lows before too long."

Reflecting the market's nervousness, one-month implied volatility - a measure of how sharp swings in the sterling/dollar exchange rate will be - last stood at 22 percent, its highest since December 2008, according to Reuters data.

Sterling has been weighed down since late last year by Brexit worries and hedging costs have spiked in recent weeks.

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.

"The longer the medium- to long-term prospects of the UK remain uncertain following a possible Brexit, the more likely it would be for the British current account deficit - the third largest in the world - to become an issue for the FX market, with the resulting risk of sterling collapsing," Commerzbank currency strategist, Ulrich Leuchtmann, said.

Reference: ANIRBAN NAG

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