09/09/2014 10:49 AST
LONDON: The cost of hedging against near-term currency swings jumped on Monday, with the options market showing its greatest bias for sterling weakness in more than two years, as concerns grew over a possible "Yes" vote in Scotland's independence referendum.
With just ten days to go before the vote, a YouGov survey for the Sunday Times newspaper put the "Yes" to independence campaign narrowly ahead at 51 percent against the "No" camp at 49 percent, overturning a 22-point lead for the unionist campaign in just a month.
That prompted investors to pull out from the pound, dragging it to a 10-month low of $1.6104. It recovered slightly to $1.6142, still down 1.2 percent on the day and more than 10 cents below an almost six-year high hit eight weeks ago.
The pound is centre-stage in the heated debate over Scotland. Pro-independence leader, Scottish First Minister Alex Salmond says Scotland will share the pound, but Westminster has ruled that out, leading to uncertainty about the currency, debt and sharing of North Sea oil revenues.
Until late last month, most investors have been factoring in only a slight chance that Scotland would vote to split up the three-century-old union with the rest of the United Kingdom.
But with polls now indicating that Scotland could be on the verge of independence, investors seem to be getting nervous.
"It's very difficult for anybody to predict exactly what the course for Scotland is on a 'Yes' vote," said Jane Foley, a senior currency strategist at Dutch lender Rabobank.
"On a 'No' vote, this is a storm in a teacup and volatility will disperse, but on a 'Yes' vote, I think volatility in sterling markets will be heightened for some time."
Uncertainty over the future of Britain and its currency, which has shed almost 3 percent in the past week against the dollar, saw the cost of hedging against near-term currency swings rise. Monday's jump in implied volatility, especially near term, puts it on track for its biggest rise since just before the 2010 general election.
Two-week sterling/dollar implied volatility - straddling the date of the vote - has tripled, rising to trade at 12 percent on Monday, traders said.
The one-month implied volatility for sterling/dollar rose to almost 9.6 percent, its highest since July 2013.
The two-month implied volatility also rose, but much less than the one-month and was trading at 8.15 percent, highlighting concerns about the fallout from a potential "Yes" vote in the short term.
"It is the near-term fallout that is leading hedge funds to seek protection," said an options trader at one UK bank. "The longer-term investors - the real money investors - have so far been on the sidelines."
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