Sterling recovers from Brexit and trade gap bashing

[LONDON] Sterling bounced almost half a per cent against the euro and dollar on Monday, with the conviction of some investors that June's Brexit referendum is reasonably priced in helping cool concerns over a record current account gap.

The pound had fallen to a more than two-year low against a trade-weighted basket in early trade, down around 2 per cent since current account numbers last Wednesday showed the deficit surging to 7 per cent of national output at the end of last year.

Global investors worry that leaving the EU would threaten the huge foreign investment flows Britain needs to fund its current account deficit, one of the biggest in the developed world at around 5 per cent of gross domestic product.

But the currency, hammered since December by worries over the vote, was bought back from mid-morning in London.

Dealers said some of those short-term traders who had sold the pound last week had opted to cash in.

Other analysts argue that the currency will bounce back quickly if Britain votes to stay in the 28-country bloc.

"In our base case that there is no Brexit, the current account will fall away as an issue," said Daniel Trum, a currency strategist with Swiss financial group UBS in Zurich.

"If you took out all the Brexit risk then the pound would not be much weaker than it was a couple of months ago." By 1530 GMT, sterling was a third of a per cent stronger on the day at US$1.4272 and up 0.4 per cent at 79.74 pence per euro.

The trade-weighted index had recovered half a per cent to 84.6 from the early low of 84.1.

Still, a number of polls have painted a worrying picture for those concerned about Brexit risks.

An online survey for Sunday's Observer newspaper showed 43 per cent support for Britain to leave the EU, ahead of 39 per cent support for staying within the bloc.

An online poll by TNS released on Friday showed the rival campaigns running neck-and-neck. Betting markets, however, are still pricing in only a one-third chance that Britain will leave the union it joined in 1973.

"This (move in the index) is a big move in a short period of time," said Stewart Richardson, chief investment officer at RMG Wealth Management, adding that the risk of Brexit would discourage foreign capital in the short term.

"We have to deal with Brexit. It is a binary outcome, and if the outcome is a vote to leave, we along with everyone else expect sterling to fall heavily. If we vote to stay in the EU, there should be some sort of bounce."

In trade-weighted terms, sterling endured its worst quarter since late 2008 between January and March, with data from the Commodity Futures Trading Commission showing speculators increasing their bets against the pound in the week to March 29.

But there are some more optimistic signs. French bank Credit Agricole said its flow data showed hedge funds as a group had bought the pound in the past week.

"According to our positioning gauge, GBP short positioning remains elevated, even if selling interest has eased on a weekly basis," strategist Manuel Oliveri said.

"Such oversold conditions may keep downside risks for sterling limited from current levels, regardless of Brexit fears (remaining intact)."

REUTERS