Pound heads for biggest drop on record as Brexit chances build

[LONDON] The pound headed for its biggest-ever drop, leading a decline in UK assets, as early results in Britain's European Union referendum pointed to a potential victory for the "Leave" campaign.

Britain's currency tumbled against all of its major counterparts, and FTSE 100 Index futures contracts slid after early results showed greater support for leaving the bloc than academics had forecast.

That 4.7 per cent decline exceeds the 4.1 per cent drop on 1992's Black Wednesday, when the pound was forced out of Europe's exchange-rate mechanism - its worst daily drop on record.

Price swings in the UK currency started to accelerate as the first results from the referendum filtered through, with sterling trading in a range of more than 10 US cents.

It earlier climbed above US$1.50 for the first time since December after a nationwide YouGov Plc survey conducted on the day of the vote showed a 52 per cent share for the status quo, and also sank as much as 5.8 per cent.

The pound has fluctuated vigorously since the start of the campaign in February, acting as a barometer for sentiment and reflecting the side of the debate in the lead.

It dropped to a seven-year low that month when former London mayor Boris Johnson announced his support for Brexit. Just last week it was as low as US$1.4013 when the ''Leave'' camp appeared to be ahead.

"It does look like the margin between the two sides is going to be relatively tight," said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London.

"Sterling volatility is going to remain elevated until we get a more definitive picture. There is definitely a lack of liquidity which is amplifying moves - wild swings seem probable as investors remain unsure which way this is going to go."

Sterling fell 4.7 per cent to US$1.4174 as of 2:15 am London time. It earlier touched US$1.5018, the highest level since December.

Bloomberg's British Pound Index, which tracks sterling against seven major peers, fell 4.3 per cent, while FTSE 100 Index contracts expiring in September lost 5.8 per cent.

The market turmoil spread beyond the UK, with the yen, a traditional haven in times of stress, strengthening, and the Australian dollar dropping.

Results showed 61 per cent voted in favour of an exit in Sunderland, while the pro-EU camp won 51 per cent of the vote in Newcastle, smaller than the forecast 12 per centage-point lead. With results from just 43 of 382 areas reported, the final picture may not be clear for several hours.

The referendum has resonated across the globe with officials in finance and central bankers warning of risks should Britain vote to remove itself from the EU. Federal Reserve Chair Janet Yellen said last week that the vote was a factor considered by officials as they decided to keep US interest rates unchanged this month.

A Brexit could see the pound plunge below US$1.35 the day after the vote, the lowest since the 1980s, according to most economists surveyed by Bloomberg earlier this month. While that may boost exporters, a lower pound could increase prices for UK consumers, and complicate the Bank of England's efforts to meet its inflation remit. The median forecast was for a range of US$1.45 to US$1.50 the day after a "Remain" victory.

"The market is struggling to digest rumour and counter-rumour on each of these individual constituency outcomes, leading to fickle sentiment in the pound," said Daragh Maher, New York based head of US currency strategy at HSBC Holdings Plc.

BLOOMBERG