Brexit worries drag sterling to 3-week lows

07/06/2016 02:07 AST

Sterling trade-weighted index fell 1 percent to hit a three-week low on Monday, while the cost of hedging against swings over the coming month traded at its highest since late 2008 on growing concerns over whether Britain will stay in the European Union.

Polling firm TNS said on Monday that the campaign to get Britain out of the European Union had a 2-point lead over the “Remain” campaign, while a YouGov poll for ITV showed that the “Leave” campaign had a 4 point lead.

Bookmakers shortened their odds on Brexit in response, with betting website Betfair putting the chances of a vote to leave at 30 percent on Monday. The odds were at around 27 percent at the start of last week.

Against the dollar, sterling was 0.6 percent lower at $1.4430, having fallen to $1.4352 in early Asian trading, its lowest in three weeks. The euro was 0.4 percent higher at 78.70 pence. Sterling’s trade-weighted index fell more than 1 percent to 85.5, its lowest since May 16, and sliding 2.5 percent since the start of this month.

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

“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 toward April’s lows before too long.” Reflecting the nervousness, the one-month sterling/dollar implied volatility — a gauge of how sharp swings will be over the June 23 referendum date — traded at 21.7 percent, its highest level since December 2008, according to Reuters charts.

The sharp rise in hedging costs comes as the spot currency has been weighed down since late last year by worries that the vote on EU membership could lead to Britain leaving the bloc. 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,” said Ulrich Leuchtmann, currency strategist at Commerzbank.

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